FDs vs PPF: Where should you invest and why?

Conservative investors tend to invest in safe investment instruments including public provident fund (PPF) and fixed deposits, among other options. Typically, investors look for assured returns on some part of their investment. It is recommended to allocate a portion of the portfolio to fixed income instruments. 

For instance, if you have a portfolio of ₹one crore, you may want to invest 30 percent in the fixed income instruments so that regardless of market movement, this investment of ₹30 lakh continues to grow at a consistent, albeit sluggish, pace. These instruments could be PPF, fixed deposit (FDs), debt mutual funds and bonds.

Here we draw parallels between the two investment schemes based on myriad criteria.

FDs Vs PPF: Which one is better?

I. Interest rate: Most banks offer an interest rate in the range of 6.7 to 7.1 percent per annum to investors. PPF offers an interest of 7.1 percent to investors. So as far as interest rate is concerned, PPF is almost the same or relatively better than an FD. Additionally, interest on a fixed deposit varies based on the tenure of investment. 

II. Income tax benefits: Any contribution made to a public provident fund is eligible for income tax deduction under section 80C of I-T Act under the old tax regime. An investment in fixed deposit, however, is not allowed for tax deduction. It is noteworthy to mention that interest income on PPF is exempt under income tax under old as well as new tax regime, whereas interest on fixed deposit is not exempt.

III. Lock-in period: Investment in PPF has a lock-in period of 15 years from the date of opening of account. There is no such restriction on redeeming of FD accounts. It can be redeemed anytime you wish. So, if you may have to unlock your investment in the near future then PPF is not the right investment choice for you.

IV. Minimum and maximum contribution: One can deposit a minimum of ₹500 and a maximum of ₹1.5 lakh in a PPF account in a financial year. There are no such restrictions imposed in a fixed deposit account. One can deposit any amount in an FD account – even ₹5 crore or more. 

So, if you have a large sum to invest – you may want to opt for FD over PPF. Alternatively, you may split the investment between the two.  

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