Public provident fund or PPF is a long term investment plan in which you continue investing for 15 years. If required, you can extend your PPF account for another 5 years term after completion of 15 years.
Fixed deposits are generally a traditional investment plan opened up in a bank in which you have flexibility of investing for a predefined period which can be between one year to 10 years period.
Both these deposit schemes are popular and considered as a secure investment option. But, there are certain issues in which PPF can be considered as a better long term investment option compare to fixed deposit.
Tax deductions for PPF and Fixed deposit
Contribution to PPF scheme is eligible for income tax deduction every year under section 80C of income tax act. At the time of withdrawal also tax payers are not liable to income tax.
In case of fixed deposit, tax payer will be eligible for income tax deductions only if it’s created for a lock in period of 5 or more years. Withdrawal before 5 years will be liable to income tax. Fixed deposits for less than 5 years are not eligible for tax deduction.
Periodic investment in PPF Vs one time investment of fixed deposit
PPF is a periodic investment plan where you can invest a minimum amount of Rs.500 per year and up to a maximum amount of Rs. 150000 per year. Please remember more than 12 transactions in a year is not allowed. Whatever amount you deposit in a PPF account, it must be in 12 number of transaction per year.
Fixed deposit is onetime investment. If you have a lump sum amount and you want to invest it somewhere to get good return then invest in fixed deposit.
Interest rate of PPF Vs Interest on Fixed deposit
Interest on fixed deposit is taxable in the hand of tax payer. Bank is also liable to deduct TDS from the interest amount. However, interest on PPF is tax free and not liable to tax even at the time of withdrawal.
If you take the post tax rate of interest then in case of fixed deposit you are getting less post tax rate of return compare to interest from PPF.
||Fixed Deposit with 5 years term
||Public Provident Fund or PPF
||Actual Interest rate
||Interest rate after tax
||Actual Interest rate
||Interest rate plus tax saved
|Tax payer is in 10% tax bracket
||8.75 – 10% of 8.75 = 7.875%
||8.8 + 10% of 8.8 = 9.68%
|Tax payer is in 20% bracket
||8.75 – 20% of 8.75 = 7%
||8.8% + 20% of 8.8 = 10.56%
|Tax payer is in 30% tax bracket
||8.75 – 30% of 8.75 = 6.485%
||8.8% + 30% of 8.8 = 11.44%
C1 is the tax bracket or tax slab rate where a tax payer can fit himself or herself as per the present tax laws of India. For example; if you are in 10% tax bracket then your effective interest rate in case of fixed deposit is in C3 and effective PPF interest rate is in C5. Compare this two and find out how much more you are getting in PPF.
If you are looking for a good rate of return on your investment then by comparing both long term investment plans we must conclude that PPF is a better long term investment plan compare to fixed deposit.
With all these benefits you also have some advantages of investing in fixed deposit compare to PPF.
Like in case of premature withdrawal you can withdraw the entire amount before the tenure period with a penalty if any charged by the bank. But in case of PPF you can only do partial withdrawal. Entire investment from PPF account can only be withdrawn after a period of 15 years.
Similarly, in case of loan, you can avail up to 90% of the whole fixed deposit as loan but in case of PPF you can take loan from the third year onwards.
There are also some other instances where fixed deposit will overtake PPF. For example; let us assume that you have a lump sum amount of Rs. 10 lakhs and wants to invest it somewhere in long term investment plan to get good return.
In this case, you can keep up to Rs. 1.5 lakhs in PPF account as that is the maximum amount up to which you are allowed to invest in PPF per year, but, how about the rest of the amount i.e. Rs.8.5 lakhs. Here you can take help of fixed deposit and it will stand out compare to PPF.
Another benefit of fixed deposit compare to PPF is that it allows you to have a periodic income. For example; assume for a moment that you retired today with Rs. 10 lakhs lump sum amount and you do not have any periodic income.
In this case you can keep the entire money in a fixed deposit and ask bank to transfer the interest amount to your saving account every month. This facility is not available in PPF.
So both PPF and fixed deposit plan has their own merits and demerits. You need to decide which one is better for you in terms of return. Please let us know your feedback and where you prefer to invest and why.