Fixed Deposit vs Public Provident Fund: Taxes, Returns, Risk - Which Is Better?

Public Provident Fund (PPF) and fixed deposits (FDs) are two unique investment options with different suitability, return potentials, and lock-in periods. Both of these options are very different in terms of their structure and flexibility and cater to different investment horizons.

The PPF scheme is a government-backed investment scheme and comes with several tax benefits. However, it has a 15-year lock-in period. This scheme also has a partial withdrawal option after the initial investment years. Meanwhile, FDs are offered by banks for fixed tenures, starting from as short as 7-14 days. 

Both investment options are often preferred by risk-averse investors due to their secure nature. Choosing any of these investment instruments should depend on your financial goals and investment horizon.

The investments made in PPF can be deducted under Section 80C of the Income Tax Act, 1961, allowing the investors to lower their total taxable income. Moreover, the final maturity value and the interest earned in this fund are also completely tax-free. While FDs allow more flexibility, the interest earned on FDs is taxable.

Interest income from fixed deposits is fully taxable and added to the total income of the investors in a financial year. The amount will be taxed at the applicable income tax slab of the investor.

Additionally, banks deduct TDS on FD interest income when the interest earned in a financial year exceeds Rs 40,000 for regular depositors. This can be later reclaimed by the investors while filing their income tax returns.

PPF and FDs are good for one’s portfolio to minimise the risk during economic uncertainty.

While PPF offers a 7.1% interest rate compounded annually, it is reviewed by the government every quarter. On the other hand, banks offer FD returns ranging 7-9% per annum over various tenures. Most banks often review the FD interest rates based on the key lending rate revision by the Reserve Bank of India (RBI) Monetary Policy Committee. The banks often increase the FD rates with every rate cut by the RBI to pass on the benefits to the customers.

Overall, due to its structure, PPF could be considered a good option for retirement savings and long-term financial goals. On the other hand, FDs are ideal for short-term savings. Choosing the right investment option should be based on your financial goals, investment duration and risk appetite. If you are looking forward to recalibrating your portfolio with secure investment tools, FDs and PPF could be suitable.