PPF vs FD: Which investment option is best for you? Find out which one offers higher returns...

When it comes to safe and reliable investments, most people consider the Public Provident Fund (PPF) and Fixed Deposit (FD) to be the best. Both schemes protect your hard-earned money and provide good interest or returns. The only difference is that PPF is a long-term scheme that comes with tax benefits, while FD offers flexibility for a shorter term and allows for immediate withdrawals.

It's important to understand which option best suits your savings and needs.

1. Tenure and Liquidity
The biggest difference between PPF and FD is their tenure, i.e., how long the money needs to be invested. PPF has a tenure of 15 years. You can withdraw some of the money only after the seventh year. Therefore, this scheme is ideal for those who want to save money for long-term goals, such as retirement or children's education.

The tenure of an FD (Fixed Deposit) is much more flexible. It can range from 7 days to 10 years. If you suddenly need money, you can break the FD. However, premature withdrawal results in a loss of interest or a penalty.

2. Interest Rate and Return
The government sets the interest rate on PPF every three months (quarterly). Currently, it is around 7.1% per annum, and compound interest is paid annually. The best part is that the interest earned on this deposit is completely tax-free. This means that you don't have to pay any tax on the interest earned. Therefore, it is very beneficial for those with higher incomes and those in the higher tax bracket.

The interest rate on an FD (Fixed Deposit) varies depending on the bank and the deposit period. Generally, it ranges from 6% to 7.5%. The advantage of an FD is that you know upfront how much you will receive upon maturity. However, the disadvantage is that the interest earned on an FD is fully taxable.

Therefore, if you want to invest for the long term and also want to save on taxes, PPF is a better option. However, if your needs are short-term or you want easy withdrawals, an FD would be more suitable.

3. Tax Treatment
Investing in PPF offers three types of tax benefits, which is why it is placed in the "EEE" (Exempt-Exempt-Exempt) category. This means that the amount you deposit in PPF is tax-free under Section 80C. The interest earned on it every year is also tax-free. When the PPF matures, the entire amount received is also tax-free.

Meanwhile, tax exemption on FDs (Fixed Deposits) is only available if you open a 5-year tax-saving FD. However, the interest earned on this FD is fully taxable, meaning tax is payable. Therefore, from a tax perspective, PPF is much more beneficial, especially for employed individuals.

4. Safety and Risk
Both PPF and FDs are considered very safe investment options. Your money in PPF is fully guaranteed by the government, meaning there's no risk of loss.

FDs (Fixed Deposits) are also safe because bank deposits are covered by deposit insurance up to ₹5 lakh. This means that if the bank is affected for any reason, your deposits up to ₹5 lakh remain safe. If your deposits exceed this amount, it's wise to keep them in multiple banks.

Both schemes are suitable for those who are risk-averse and want a safe investment. However, PPF also offers interest on interest, which makes it even stronger as it protects your money from inflation in the long run.

Which option is better for you?
If you want to invest for the long term and also save tax, PPF is a good option. Its 15-year lock-in period instills the habit of regular savings, and the tax-free interest earned on it makes it an excellent retirement scheme.

However, if you frequently need money in a short period of time or want an investment with fixed and immediate returns, an FD is better for you.

The best approach for most investors is to invest in both schemes. Keep the PPF for your long-term goals, such as retirement or children's education, while the FD is used for emergencies or other needs.

Which option is better for senior citizens?

FDs are more beneficial for senior citizens because they receive regular monthly or quarterly interest income. PPF, on the other hand, is ideal for those who want to save money for the long term.

What happens if you break an FD prematurely?

Premature withdrawals are possible, but they typically incur a penalty, reducing the return. Partial withdrawals from PPF are only permitted after the seventh year and only up to a limited amount.

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