8 minsNovember 22, 2017
Investing in fixed deposit (FD) or public provident fund (ppf) and other investment avenue requires some basic know-how on your part – the investor. People get confused between fd and ppf simply going by what friends and family says can
do more harm than good to your hard-earned money. Thus, it is imperative for you to exercise a certain degree of caution, self-learning, and be responsible for your investments.
This should be the approach even when you are investing in a bank fixed deposit or Public Provident Fund (PPF), the most common instruments suitable for risk-averse investors.
Lets us understand the basic difference and benefits between FD and PPF
What is a Bank Fixed Deposit (FD)?
Bank Fixed Deposits (FDs), also known as term deposits, is the most traditional form of investment in India. You earn a fixed rate of interest on your investment, serving your objective of wealth creation.
There are various types: A bank FD, FD with sweep-in facility, flexi-deposit, special deposits (which come with certain benefits or perks) and so on.
Further, you have the choice to receive interest on your deposit at maturity i.e. cumulative, or non-cumulatively –– either monthly or quarterly for the tenure you choose. A bank fixed deposit of a higher amount will attract a higher
interest rate and likewise.
The interest earned on bank FD is taxable as per the provision of the Income-tax Act, 1961; therefore usually tax is deducted at source (TDS).
Here are 10 Benefits of a Bank FD:
- Today, a FD can be booked/opened online (most banks have this facility) in few minutes
- Offers a higher rate of interest than keeping money in a savings account
- The returns are fixed –– there is no risk as in case of market-linked instruments
- Encourage savings
- Facilitates wealth creation
- You have the flexibility to choose the tenure
- You can hold multiple FDs with multiple banks
- You can avail a loan against the bank FD
- It is a liquid investment (since bank FDs can be prematurely withdrawn)
- Section 80C deduction for investments in Tax Saving Bank Deposits
When investing bank FDs, consider the one offered by Axis Bank for a hassle-free experience. You can start with as little as Rs 5,000, while there isn’t a maximum limit. Your hard-earned money can be transferred seamlessly from your Axis
Bank savings account to the fixed deposit, whereby you can earn higher rate of interest and compound wealth.
A bank FD can be opened by:
- Resident Individuals
- Hindu Undivided Families (HUFs)
- Proprietorship Firms
- Partnership Firms
- Limited companies
Even NRIs can open a bank FD.
Make it a point to have a nomination. A nominee is a person who will have legal right after your demise. A nominee can be your legal heir (a family member) or anyone who is not a part of the family. You can nominate by filling in the nomination
form and submitting it to the bank. For bank FDs held in joint name, the nomination process needs to be carried out jointly by all the holders. Further, a nomination can be made only in individual capacity and not official capacity, using
designations. In most cases, one can nominate only individuals and not organisations, barring for certain Trusts.
What is a Public Provident Fund (PPF)?
The Public Provident Fund PPF is one of the most popular investment avenues in India. PPF is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, PPF is a Government-backed, long-term small savings scheme which was initiated
to provide retirement security to self-employed individuals and workers in the unorganized sector.
So, if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, earn a tax-free interest and the maturity proceeds too are
exempt from income-tax. Hence, it is said that PPF enjoys an E-E-E (Exempt-Exempt- Exempt) status from an Income-tax angle.
The main features of a PPF account are:
|Eligibility||Applicant needs to be a Resident Indian|
|Entry Age||No age is specified
(Minor is allowed through guardian)
|Interest rate||7.80% p.a. compounded annually*
|Tenure||15 financial years (plus the first year of investment)|
On completion of 15 years, the account can be extended in a block of 5 years
|Minimum Investment||Rs 500 p.a.
|Maximum Investment||Rs 1,50,000 p.a.|
(A maximum of 12 deposits allowed in a financial year)
|Tax Benefit||Up to Rs 1,50,000 under Section 80C;
Interest earned is exempt from tax and so are the maturity proceeds
|Can be opened at||Any Post Office and some authorized branches of Banks
|Who cannot invest||Hindu Undivided Family (HUF);|
Non-resident Indians (NRIs);
and Person of Foreign Origin
|Mode of Payment||Cash / Crossed Cheque / Demand Draft / Pay Order / Online Transfer in favour of the Accounts Officer
|Nomination||Nomination facility is available
PPF offers loans against the account which can also help you during occasions such as a wedding in the family, higher education of your children, etc. Above all, it gives you a peace of mind as your money is safe.
Keep in mind, you need to be disciplined to make the most of your PPF investment, and also meet your liquidity needs elsewhere; because under this investment avenue your money is blocked for a good 15 years. Have a long-term investment horizon;
it can help you in retirement planning as well.
If you wish to know more and open a PPF account, reach out to your Axis Bank relationship manager.
Distinguishing Points between a Bank FD and PPF:
- Interest Rates
At present, the rate of interest on a 1-year bank FDs offered by most banks ranges from 5.00% to 7.00% per annum.
On the other hand, interest rate on PPF is currently 7.8%. This rate is subject to change/reset every three months based on the 10-year G-Sec yield of the previous quarter. This is intended to keep bank deposits competitive and closely
aligned to other Small Savings Schemes (SSS) such as National Savings Certificates (NSCs), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Yojana (SSY)
- Maturity or Lock in Period
There is no lock-in period for bank FDs, except for a Tax Saving Bank FD. The maturity period for a bank FD ranges from 7 days to 10 years.
But in case of PPF, your money is blocked for
the first 5 years and matures only after 15 years. But this instils discipline, particularly if you wish to plan for your golden years by earning a decent rate of return, enjoy tax benefits (deduction and tax free interest), and have a
long-term investment horizon.
- Premature Withdrawals
Most of the banks give you the flexibility to withdraw the money from fixed deposits before maturity. Meaning, you can prematurely withdraw from bank FD in case of any emergency or financial crisis
or owing to any other reason, subject to a penalty (0.5% to 1.0% lower interest than the contracted rate) and other terms & conditions, except for a Tax Saving Bank FD that have a strict lock-in. Hence, always make it a point to read
the fine-print before you decide to invest.
On the other hand, in PPF you are eligible to withdraw money any time after the expiry of 5 years from the end of financial year when the initial subscription was made. This is an amount
of not more than 50% of the previous financial year’s balance or the 4th financial year, immediately preceeding the year of withdrawal, whichever is less. You cannot make more than a single withdrawal in a financial year. You need
to apply with ‘Form C’ for any withdrawals.
- Tax benefit and implications
"Only investments in Tax Saving Bank FD are entitled to deduction under Section 80C of the Income-Tax Act (subject to current maximum permissible deduction of Rs 1,50,000 per annum). For the rest, this tax benefit is not available."
The interest earned on a bank FD, including the tax saving bank FD, is taxable as per one’s income tax slab on accrual basis. If the interest amount exceeds Rs 10,000 the bank will deduct tax at source (TDS) @ 10%, and if you
haven’t provided your PAN then @20%.
PPF on the other hand enjoys an E-E-E status. Meaning, when you invest/contribute you enjoy a tax deduction under Section 80C of the Income-Tax Act, 1961, then the interest earned is not
taxable, plus the amount at maturity too is exempt from tax. This makes PPF a tax efficient investment avenue.
- Loan facility
Most banks do offer a loan against your fixed deposit. You can avail for a loan upto 80-90% of your fixed deposit amount. The interest charged on such a loan is comparatively lower than for personal (unsecured)
A loan facility is available on a PPF account too. The first loan can be taken in the 3rd year of opening the account. For example, if the account was opened during the year 2010-11, the first loan can be taken during the year 2012-2013.
The loan amount will be restricted to 25% of the balance, including the interest for the year 2010-11 in the account as on 31/3/2011. The loan must be repaid in a maximum of 36 EMIs, i.e. 3 years. You can take a second loan against your
PPF account before the end of your 6th financial year, but your second loan can be taken only once your first loan is fully settled.
- PPF or FD: Which Between the Two Should You Invest in?
Both PPF and FDs both are worthy investment avenues. But, keep in mind your liquidity needs, interest rate scenario, risk profile, investment objective and inflation before investing your hard-earned money.
FDs offer easy liquidity, which is not available in PPF. But even while investing in a bank FD, take a well-thought out approach and read the terms & conditions carefully before investing. To maximise the tax benefits, PPF is
a promising and investment avenue, particularly when planning your retirement.
By investing in fixed deposit and PPF, you ensure that you have put your money to work with some amount of security. To accelerate the pace of wealth creation process, you can also consider investing in mutual funds to diversify
your investments. Always remember to choose your investment avenues wisely. Adopt a need-based approach; invest in various asset classes, whereby the risk can be managed better while you endeavour to achieve the envisioned financial goals.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.