Fixed Deposits vs PPF: Which is Better for Long-Term Savings?

Both PPF (Public Provident Fund) and Fixed Deposits (FDs) are excellent long-term investment options. They offer stable and guaranteed returns at minimal risk. However, there are key differences that investors need to be aware of. While PPF offers tax benefits and long-term returns, FDs offer flexibility and liquidity.

Making a decision between these two popular investment options requires careful consideration of their features, benefits, and suitability for your financial goals. In this article, we have compared FD vs. PPF to help you understand which option is better for long-term savings.

Difference Between Fixed Deposits and PPF

1. Tax Benefits

PPF: Contributions made towards PPF are eligible for tax deductions under Section 80C of the Income Tax Act. The interest earned and maturity amount are tax-free, making it an attractive option for long-term savings. This unique feature gives PPF an "exempt-exempt-exempt" (EEE) status, making it highly beneficial for individuals looking for tax-efficient investments.

FDs: Unlike PPF, regular FDs do not offer tax deductions on contributions. However, there’s an exception. Investing in Tax Saver Fixed Deposits would give you tax benefits under Section 80C of the Income Tax Act, 1961. These are special FDs that come with a lock-in period of 5 years.  The interest earned on FDs is taxable based on your income tax slab. As per current rules and regulations, a minimum of 10% TDS is levied if the interest income exceeds ₹40,000 (for normal citizens) and ₹50,000 (for senior citizens). It's important to factor in the tax implications before choosing FDs as a long-term savings option.

2. Interest Rates

PPF: The current interest rate on PPF is 7.1% (for the July-September quarter). The government announces the rate every quarter. PPF offers a fixed interest rate that remains constant throughout the investment tenure. This stability can be advantageous for individuals seeking predictable long-term returns.

FDs: FD interest rates are determined by banks and vary based on factors such as tenure and market conditions. Banks offer different interest rates, and these rates can fluctuate over time. It's important to compare FD rates offered by different banks before making a decision. Additionally, some banks provide higher interest rates for senior citizens or for longer tenures.

Let's look at an example to understand how interest rates impact your returns:

Scenario:

• You have ₹5 lakh to invest for a period of 5 years.
• Bank A offers an FD interest rate of 6% per annum.
• Bank B offers an FD interest rate of 7% per annum.

Calculation:

• Interest earned from Bank A FD = ₹5,00,000 * 6% = ₹30,000 per annum
• Total interest earned over 5 years = ₹30,000 * 5 = ₹1,50,000
• Interest earned from Bank B FD = ₹5,00,000 * 7% = ₹35,000 per annum
• Total interest earned over 5 years = ₹35,000 * 5 = ₹1,75,000

As you can see from this example, even a small difference in interest rates can significantly impact your returns over time. It's essential to compare and choose an FD with competitive rates to maximise your long-term savings goals.

3. Liquidity/Lock-in Period

FDs: Fixed Deposit tenures range from 7 days to 10 years. This flexibility allows you to choose a tenor that aligns with your financial goals and liquidity requirements. However, if you need to withdraw money before the maturity period, you may face penalties or reduced interest rates. Please note that premature FD withdrawal is applicable for callable FDs (FDs that don’t come with a lock-in period). For instance, Tax Saver FDs come with a lock-in period of 5 years.

PPF: PPF has a lock-in period of 15 years, making it better suited for long-term goals like retirement planning. After the completion of 15 years, you can either withdraw the full amount or extend the tenure (in blocks of 5 years) as per your requirement. PPF allows partial withdrawals after completing 5 financial years of investment, providing some degree of liquidity. 

However, the withdrawal amount cannot exceed 50% of the balance at the end of the 4th immediately preceding year, or 50% of the balance at the end of the immediately preceding year, whichever is lower. You may have to get hold of PPF withdrawal form (Form – C) from the concerned bank where you have opened your PPF. 

After that, you need to fill out the form and submit it to withdraw your amount. Unlike FDs, where you can withdraw amount online, for PPF withdrawal, you need to physically visit the bank.

4. Risk

FDs: FDs are considered relatively safe investments as they are backed by banks and protected by the DICGC up to ₹5 lakh per depositor per bank. This makes them a low-risk option for individuals looking for stability in their long-term savings.

PPF: PPF is also a low-risk investment choice as it is fully backed by the government. The government ensures that your invested amount is secure and guarantees a return on your PPF account.

5. Investments

FDs: Investment in FDs require lump sum investment. Once you open an FD account, you cannot invest periodically. The initial amount invested stays parked in the account till maturity. The minimum investment amount varies from bank to bank but is typically capped at ₹1,000. Other than Tax Saver FDs, there’s no maximum investment amount limit for FDs.

PPF: You can invest in PPF every year in lump sum or in instalments. The maximum amount you can invest in PPF is capped at ₹1.5 lakh. The maximum number of contributions in a calendar year is 12. The minimum amount in a financial year is capped at ₹500. As per the rules, investors have to deposit the bare minimum amount (₹500) to keep their Public Provident Fund account active.