Here is what you should know before you choose between PPF and FD
- The interest rate of PPF is revised quarterly by the government
- Premature withdrawal of FD attracts a penalty which varies from 0.5% to 1%
- PPF falls under EEE, being more tax friendly than FD
All the hard work you have put in at work has got you a well-deserved promotion. While you have already planned a vacation to celebrate, you are also contemplating investments with the raised salary. As a beginner, you decide to first invest in non-risk investment options. Surfing through several websites, you consider fixed deposit and public provident funds. Now, you may ask yourself, which is the best investment, FD or PPF? To decide on either, you need to know its various features. A major factor in deciding between the two would be the returns you would receive through interest. Let’s consider the salient features of FDs and PPF to help you decide the right option.
Fixed deposits (FDs) are instruments offered by banks, NBFCs, and post offices as fixed investment schemes. Simply put, you deposit a fixed amount of money for a fixed period at a fixed rate in a fixed deposit. Also called ‘term deposit’ and ‘time deposit’ the period of fixed deposit varies between 7 days to 10 years.
Premature withdrawal of Fixed Deposit has different rules. For premature withdrawal in FDs, banks charge a penalty. Premature withdrawal also affects the overall interest.
Public Provident Fund
Public Provident Fund is a government investment scheme introduced in 1986 to encourage small-scale saving. It aims at providing retirement security to self-employed individuals and workers in the unorganized sector. Any Indian resident can invest in a provident fund. Age is not specified, and a minor’s account can be opened through his/her guardian.
Premature withdrawal in PPF is allowed only after the expiry of 5 years from the end of the financial year in which you made the investment. It also contains an upper cap of withdrawal.
Fixed Deposit Interest Rates– You can choose to receive the interest on fixed amount either on maturity or in regular intervals. That interval can be either monthly, quarterly or annually as per the tenure, you choose. The interest rates on fixed deposits are higher than a regular savings account. Moreover, you get a higher rate of interest for a higher amount of deposit. Investing in fixed deposits is safer as the interest rate is fixed and is not dependent upon market conditions. Different banks offer different interest rates. The current interest rate of fixed deposit is between 5 to 7%.
Public Provident Fund Interest Rates– The interest on Public Provident Fund is decided by the government and is revised every quarter. The rate for the current quarter is at 7.6%. Determining interest rates of small saving schemes is based on the previous three years yield of government securities.
PPF vs. FD
Let us look into other factors to help you decide between FD and PPF.
FD vs. PPF is purely based on how long you are intending to invest. FD interest rates differ from lender to lender and therefore you might be able to get a good deal based on a thorough research PPF, on the other hand, offers a higher interest rate on FD only on the condition of a larger lock-in period. When you ask yourself the next time, should I invest in FD or PPF, keep in mind all these points and then finalize one. If you plan to use your funds during a short-term, FDs are the way to go. But if you plan to park them for a longer duration, PPF can provide you with better interest rates.
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