PPF vs Fixed Deposits: Which is better and why?


Public Provident Fund (PPF) and fixed deposits in banks are the two safest investment instruments for risk averse investors. Is PPF better than bank FD or vice versa? Find out in this comparison between PPF and fixed deposits, which is better, when, and why.

If you are into the twenties, have just started earning, and are planning for long term investments, choosing the right instruments can be a very confusing task. While young investors are advised to invest 20 to 30 percent of their net investment in equity based mutual funds, rest should go in secured investments where safety of the capital is of utmost importance. Typically, PPF and bank fixed deposits are the two safest and most popular avenues for risk averse investors; because PPF is backed by the Government of India and nationalized bank FDs are also highly secured.

Nevertheless, if you do not earn enough to exhaust your annual PPF limit and still have bank term deposits, some questions might arise. Most popular questions about PPF and bank FD that I have come across are:

Fixed Deposits vs PPF: Golden Balance

  1. I invest in bank fixed deposits. Should I still open a PPF account?
  2. PPF or bank fixed deposits, which one is better?
  3. Does PPF give higher returns than bank FDs, or vice versa?
  4. I don't earn enough to run both PPF and bank deposits. How much should I invest in each?

Let us try to answer all these questions one by one.

Should I open a PPF account despite having bank deposits?


Yes, you should. The greatest advantage of the Public Provident Fund is, it is a tax saving instrument that yields great interest too. In short, a double advantage. Starting with a meagre minimum of Rs. 500 per annum, you can invest up to Rs. 100,000/- p.a. in PPF, and your annual contribution will be exempted from your income tax under section 80C of IT Act. And since PPF is now market linked, you can expect good interest rates, at least at par with bank FDs. PPF can also be used as a great retirement tool, even if you keep putting away small sums on a regular basis.



PPF vs Bank Deposits: Advantages and disadvantages


Advantages of term deposits over PPF: The main disadvantage of PPF is the long 15 years of lock-in period, whereas the tenure for bank term deposits vary from 7 days to 10 years. Also, some banks offer better returns at present than the current PPF interest rate of 8.8% per annum. Again, PPF interest is compounded annually, whereas the same for term deposits are compounded quarterly (RBI is pressing the banks to compound it monthly, and soon we may have that). Thus, if you invest in some bank FD for 1 year at 8.75% p.a., the effective yield (9% p.a.) outwits PPF interest. If you are not a taxpayer and don't need tax deductions u/s 80C, it might be good idea to invest in better paying bank deposits for short terms and then move the capital to PPF. We will explain this in details in the next sections.

Advantages of PPF over term deposits: Tax deduction u/s 80C is the biggest advantage. Your contribution to PPF is exempted from IT, and the maturity amount is not subject to capital gains. Also, being government backed, Public Provident Fund is the safest investment. As mentioned before, it can also serve as a great pension plan, especially for people not having Employees Provident Fund (EPF), retirement plans from insurance companies, or any other structured pension covers.

Also See: Various loans available in India and when to use them

PPF or bank FD which one gives higher returns?


Highest bank deposit interest rates
This mostly depends on whether you are a tax payer or not. For those who do not pay income tax, bank FDs often yield more due to better interest rates in many cases as well as shorter compounding cycles (see above). However, bank deposits are subject to tax deductions. Here is a chart of highest bank deposit interest rates equal to or more than 9% p.a. Since bank interests are quarterly compounded, these deposits will give you higher returns than PPF, if you are not taxed. Even if you fall in the 10% tax bracket, bank deposits may be beneficial. If you are in the 20 or 30% tax bracket, first exhaust your PPF limit and then only go for bank deposits, because post-tax returns of bank FDs will be lesser than PPF yields.

Thus, if you fall in 10% tax brackets, put in Public Provident Funds what you would pay as tax. Use it as a tax saving instrument, and otherwise concentrate on fixed deposits to enjoy higher effective yields. If you pay no income tax, it is obviously better to keep investing in bank fixed deposits and accumulating higher returns. Later, when you would need to pay tax, you can move your capital to PPF.

So, if you pay no tax, should you open a PPF account? You should, and the next section explains why.

How much should you put in PPF, especially if you pay no tax?


  • If you are not a taxpayer at present, invest in short term bank FDs and then move the capital to Public Provident Fund. However, do not postpone opening PPF account, because the earlier you do that, the sooner you can exhaust the lock-in period of 15 years. If you open it now, 12 or 13 years ahead you can be use it as a great short term deposit tool, not worrying about tax or capital gains.

  • The minimum yearly contribution to PPF is just Rs. 500. If you are not under taxation right now, just keep putting meagre amounts like Rs. 500 or 1000 annually to keep your account alive.

  • People under 10% tax bracket can consider putting the payable amount for IT into PPF. If you need to pay Rs. 10000 as income tax annually, put that into PPF to get exemption u/s 80C. Rest of your capitals should move to bank deposits, mutual funds or stocks, depending on your risk aptitude, investment goals and time horizons.

  • If you are under 20 or 30 percent tax brackets, first exhaust your PPF account limit or Rs. 1 lakh per year (as of now), and then think of other instruments.

Do you agree with me? Let me know what you are thinking about these PPF and FD comparisons. Why don't post a comment below?


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Comments

Guest Author: Abhay Nagpal08 Apr 2014

Very informative for first time job people.

Guest Author: Sdfdsf11 Feb 2015

Ordinary fixed deposits cannot be used to save tax under Section 80C. To save tax you should invest in Tax Saver Fixed Deposits which have a lock in period of five years. You cannot withdraw any amount during this term.

Author: Timmappa Kamat23 Feb 2015 Member Level: Diamond   Points : 3

Great insightful article for those who want to have a good investment for the life after retirement. The PPF is also useful for those not coming under income tax net because of the smaller amount of deposit needed per annum. Your comparison among different banks rather than giving a generalised comparison gives more insight into what and how much to invest in.

Guest Author: Susanta Kumar Achary30 Mar 2015

If I invest in PPF for 4 to 5 years and due to uncertain reason could not continue then what will happen? Further if I want to continue the account some times later what to do?

Guest Author: Sukhwinder Kaur08 Dec 2015

I am thinking to invest around 1 Lakh while opening a PPF account and then use it for tax saving purpose. Please tell me whether I can reuse this investment for saving tax for next year too. If yes then how? I mean how much amount I need to add to my account so that it validates for the tax saving?

Author: Umesh13 Aug 2017 Member Level: Silver   Points : 3

PPF is still a good choice though interest rates everywhere in govt or bank backed securities are decreasing day by day.
Govt has announced this year a 10 years FD type of deposit scheme for senior citizen fetching 8.3% per year return on their investment limited to investment of only Rs 7.5 lac per family.
This scheme is open for subscription and is being operated by LIC.
Due to decrease in interest rates people are switching from FD to mutual funds and bonds also.



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