Fixed Deposits vs PPF: Where To Invest For Stable Returns?

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Fixed Deposits (FDs) and Public Provident Funds (PPFs) are two of the most popular investment options in India, especially for the risk-averse.

But with key differences in their features, choosing between them can be a head-scratcher.

In this article, we’ll simplify both and help you choose the right investment.

FD Tenures Are Flexible, PPF Has A Fixed Tenure

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FDs offer flexibility; you can pick a tenure between 7 days and 10 years.

In the case of PPF, the mandatory tenure is 15 years, with an option to extend it in blocks of 5 years.

FDs are Single Lumpsum Investments. PPFs can be Lumpsum or Series of Investments

Imagine you just received a lumpsum amount - as a gift or bonus and want to invest it.

With an FD, you can go all in - invest a lumpsum amount for a specific period, and your job is done.

On the other hand, with PPF, you can invest a lump sum amount or opt to invest small amounts regularly. While this may be a good option, these investments are not automated, and you will have to invest manually every time.

Here’s another catch—to keep your PPF account active, you need to invest at least Rs. 500 every year (during the PPF tenure).

Minimum Investment For FDs is Rs 5,000 | PPFs Require Just Rs 500

The minimum investment required to open a fixed deposit account varies between Rs. 1,000 and Rs. 5,000, depending on the financial institution.

Keep in mind that fixed deposits are one-time investments, and additional contributions aren't allowed. If you want to invest more, you'll need to open a new FD account.

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On the other hand, the minimum investment for PPF is Rs. 500, and you can invest more funds in the same account at any time.

But wait, there’s a limit.

FDs Have No Deposit Restrictions | Maximum Limit for PPF is Rs 1,50,000 per year

Rarely do financial institutions have any restrictions on the maximum FD amount.

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On the other hand, you cannot invest more than Rs. 1,50,000 per annum in your PPF account.

You can either make a lump sum investment or invest regularly - however, the sum of all your investments in that year cannot exceed Rs 1,50,000.

Fixed Deposits Don’t Become Inactive, PPF Can

FDs are simple. You invest. You receive periodic interest and whenever the FD matures, you get your principal back. No action is required from you after you invest in the FD.

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However, PPF accounts become inactive if at least Rs. 500 is not invested every year.

Let’s assume you invest Rs. 500 in your newly opened PPF account in 2019. But in 2020 you forgot to invest - this would deactivate your PPF account.

Rules say that you should invest Rs. 500 you missed in 2020 to activate the account before you can make incremental contributions.

Your FD’s Interest Rate is Fixed, PPF Interest Rates Keep Fluctuating

We want to be clear that in FDs as well as PPF, you get a fixed interest rate. But here’s the difference:

When you sign up for a fixed deposit, you lock-in the interest rate for the tenure of the FD which can range from a few days to many years. While your FD is active, if the FD rates in the market change, your active FD’s rate will not be affected.

Since we are talking about FD interest rates, here’s something you should know.

It’s 2024 and high FD rates are back after many years. So, if you are considering investing in a fixed deposit, consider investing in a high interest rate fixed deposit on Altcase.

It’s very easy and you can invest in FD’s with rates as high as 9% without opening a bank account and within 90 seconds!

Invest in high interest FDs on Altcase ->

Coming back - PPF interest rate works differently from FD interest rate.

When you invest in PPF, the interest rate for the next quarter is fixed. This interest applies for the all amount that’s accumulated in your PPF account in addition to any new investment you make in that quarter.

But the interest rate could change in the next quarter. The new interest rate would apply to your accumulated PPF balance as well as any new investment you make in the next quarter. And so on!

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So, while the PPF interest rate is fixed and assured by the government, it can change as frequently as once a quarter or 4 times a year.

This means you cannot predict how much money you will accumulate in your PPF balance in the future because the interest rate on your PPF balance may keep changing every quarter.

FDs Can Generate Regular Income, PPF Can’t

While investing in an FD, you can choose to either reinvest the interest (cumulative FD) or receive interest payouts (non-cumulative FD).

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If you choose to receive interest payouts, your FD becomes a regular income generating instrument.

On the other hand, PPF interest gets directly reinvested into the fund. You can’t withdraw it under normal circumstances. So, PPF cannot function as a regular income generating instrument like fixed deposits.

FDs are Insured by the DICGC, PPF Isn’t

Fixed deposits and PPFs are among the safest investment options out there. While FDs are offered by banks, PPFs are backed by the Government of India (GOI).

But, FDs enjoy an added safety from DICGC, an RBI subsidiary that insures bank deposits up to Rs. 5 lakhs per bank per depositor.

DICGC → Deposit Insurance and Credit Guarantee Corporation

This means even if your bank goes out of business, your deposits with it are insured up to Rs. 5 lakh.

Note: Although PPF is not explicitly insured, it is backed by the Government of India and can be considered to be safer than fixed deposits despite the DICGC insurance that FDs enjoy.

FDs Offer Benefits for Senior Citizens, While PPF Doesn’t

Most banks and NBFCs offer slightly higher interest rates on FDs to senior citizens depositors.

NBFC → Non-Banking Financial Institution

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Senior citizens are offered an additional interest rate of 0.25%- 0.50% when they sign up for fixed deposits.

As most seniors heavily depend on their savings to sustain themselves during retirement the higher interest rate goes a long way.

PPF, on the other hand, doesn’t offer any such incentives to senior citizens.

Considering the reliability and attractive interest rates, fixed deposits are a compelling choice for senior citizens seeking to grow their savings.

Premature Withdrawals Attract Penalty for Both FDs and PPF, But PPF Withdrawals are Not Straightforward

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Fixed deposits, although easy to withdraw, attract a penalty of 1-2% (depending on the FD issuer) if you withdraw prematurely.

This means if your FD’s interest rate during the deposit was 7% for 2 years and you decide to withdraw prematurely, say, after 1 year - the interest you would earn would be lower at around 5-6%.

Note - Withdrawals are not possible in the case of 5-year tax saving FDs.

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On the other hand, PPF premature withdrawals attract a 1% penalty.

For instance, if your PPF account is earning an interest of 7.1% and you close the account prematurely, the interest rate will be reduced to 6.1%.

Also, premature withdrawals and closures are subject to many conditions. Here’s a table summarising the details -

Type of Withdrawal	Duration	Reason For Withdrawal	Permitted Amount
Premature account closure	After 5 years from account opening	Health/education related	Entire amount
Partial withdrawals	After 6 years from account opening	Any	50% of the total available balance

Note - Only 1 premature withdrawal is allowed in PPF per financial year.

Borrowing Against FDs is Better than Borrowing Against PPF

You take loans either without collateral (like personal loans, the most expensive option) or by pledging securities like an FD, PPF, stocks, mutual funds etc.

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You can get a loan of up to 90-95% of the fixed deposit value.

Interest Rate on Loan Against FDs:

As of May 2024, SBI charges a 1% higher interest rate than the FD you are borrowing against. So, if you borrow against an FD that promises to pay an 8% interest rate, SBI will charge you a 9% interest rate.

You can also borrow against your PPF account balance. But it is not as straightforward or friendly as borrowing against FDs. Here are some rules -

Until the time you repay the loan against PPF, your PPF balance doesn’t earn interest

Interest rate on loan against PPF is 2% as of May 2024

Loan against PPF can be taken only between the 3rd and 5th years

Maximum value of the loan against PPF can be 25% of the PPF balance at the end of 2 years

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The list of rules and details of loan against PPF goes on and on and can confuse even the most financial literate.

Long story short - borrowing against your FDs is better than borrowing against your PPF balance.

Fixed Deposits Attract TDS, PPF Doesn’t

TDS → Tax Deducted at Source

When your FD earns interest, it's credited to you after TDS deduction, if applicable.

Here are some of the key points regarding TDS on FD interest:

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TDS is deducted if the FD interest exceeds Rs. 40,000 for individuals and Rs. 50,000 for senior citizens annually.

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If you have linked your PAN, a TDS of 10% is deducted; without, it's 20%.

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If you fall below the taxable income slab, you can submit Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to the bank, instructing them not to deduct TDS for that financial year.

Remember, TDS isn't the only tax FDs attract. The total interest earned is added to your annual income and taxed according to your highest income tax rate.

On the other hand, PPFs do not have any TDS deductions and as we will see PPF enjoy the EEE tax status.

PPF is More Tax Efficient Than FDs

Only if you invest in tax-saving FDs, your investments up to Rs. 1,50,000 are tax exempted under Section 80C. No other tax benefits are available for FDs.

Further, regular FDs are taxed at your highest income tax rate.

PPF, on the other hand, enjoy EEE tax status which stands for (Exemption Exemption Exemption). Here’s what this means:

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Investment in PPF is exempt from tax (this is under Section 80C)

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Interest earned on PPF is exempt from tax

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Maturity amount from PPF is exempt from tax

It is easy to see that PPF is more tax efficient than FDs.

Fixed Deposits vs. Public Provident Fund: Summarising The Differences

Aspect	Fixed Deposit	Public Provident Fund
Tenure	Flexible, 7 day to 10 years	15 years lock in period
Investment mode	Lumpsum	Can be single but minimum Rs. 500 per year to be invested to keep account active
Minimum Investment	High \| Rs. 1,000 to Rs. 5,000	Low \| Rs. 500
Renewal	Can be renewed after maturity - not mandatory	Minimum investment of Rs. 500 required to keep account active
Maximum Investment	No limit	Rs 1,50,000 per year
Interest Rate	High interest rate and fixed during the deposit tenure	Varies based on the quarterly announcements.
Source of Regular Income	Yes	No
Predictable Returns	Yes	Fairly predictable but not as exact as FDs
Insurance	Insured up to Rs. 5 lakh by DICGC, an RBI subsidiary	No such insurance
Senior Citizen Benefit	Higher interest rates by 0.25% to 0.50%	No such benefit
Premature Withdrawals	Allowed but interest rate earned will be 1-2% lower than initially promised	Possible only under certain conditions and after 5 years of investing. Interest rate earned will be 1-2% lower than initially promised.
Loan Facility	Available	Available only during specific tenures
TDS	10%	No TDS
Tax Saving	Certain 5-year FDs are eligible under IT Section 80C, which helps you lower your taxable income by up to Rs. 1.5 lakh per financial year	Investment, Interest Earned and Maturity Amount - All are tax-exempted

Fixed Deposits vs. Public Provident Fund: Frequently Asked Questions (FAQs)

Which is better, PPF or FD?

High returns over the short term -> FDs should be preferred

Stable returns over the long term -> PPF should be preferred

Retirement planning -> PPF should be preferred because of their great tax benefits

Tax saving under IT Section 80C with short lock-in -> FDs work better (especially in 2024 when FD rates are high)

Regular income generation -> FDs are better with their flexible interest payment frequencies

Finally, it is not important to choose just one among the two. You can invest in both in varying proportions as per your investment needs.

Tax saver FD vs PPF - What is better?

Tax saver FDs have a maturity period of 5 years whereas PPF has a maturity of 15 years. Premature withdrawal is not possible in tax saver FDs while it is possible in PPF (subject to a few conditions) after 5 years.

So, in terms of maturity, FDs work out better than PPF.

But in terms of post-tax returns, PPF works out better than tax saver FDs - at least for those in the higher tax bracket of 20%+. PPF is completely tax free while interest earned on tax saver FDs is taxed based on your tax bracket.

In 2024, pre-tax returns are higher on tax saver FDs so that can be considered after taking into account your applicable tax bracket.