PPF Vs FD: Which is better if you want to remain invested for the long haul?

As a conservative investor, there are a few investment options that you can explore, including sovereign bonds, debt mutual funds, fixed deposits (FDs), small savings schemes and public provident fund (PPF), among others.

Here, we compare two popular investment options – PPF and fixed deposits – based on key parameters: rate of return, tax treatment and lock-in period.

Why should you invest in FD and PPF?

These options are recommended for investors who are looking for safe and assured returns on their investment. Although most fixed deposits (FDs) deliver anywhere in the range of 6 to 7% annual return, the return is guaranteed, thus incentivising investors to allocate a portion of their portfolio to these schemes.

The reason to opt for PPF is to keep your money ‘locked-in' so as to avoid slipping it through your fingers. Some of us tend to have a higher propensity to spend, leaving us to live from paycheck to paycheck. It is recommended that such investors lock some money every year in a fixed-income instrument with a lock-in period.

FD Vs PPF: Which is a better investment?

I. Rate of return: Most banks give an annual return of 6.25% per annum to a regular investor and 6.75% to senior citizens on one-year FDs. On long-duration FDs, one can earn around 6.5-6.6% a year (7% for senior citizens).

Read this Livemint article for the latest interest rates on term deposits by the top 8 lenders.

Meanwhile, PPF offers 7.1% per annum, which is marginally higher than what most banks give on their term deposits.

Verdict: When seen from the lens of rate of return, PPF is better than FD

II. Tax treatment: Income on FD (interest) is taxable as per your slab. Those falling under 10% slab are supposed to pay 10% tax on their interest income and those under 30% slab are meant to pay 30% tax. However, income from PPF is tax-free. Although investment in PPF is not allowed as a deduction in the new tax regime, the interest income continues to remain tax-free.

Verdict: Seen from the lens of tax treatment, PPF is definitely better

III. Lock-in period: An FD typically can be redeemed whenever you wish. However, you lose out on the interest. On the contrary, PPF has a lock-in period of 15 years. However, partial withdrawals are allowed before maturity. So, if you want the flexibility to withdraw, investment in an FD scores over PPF.

Verdict: Seen from the lens of lock-in period, FD is far better than PPF.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.

For all personal finance updates, visit here