Know how a Bank FD differs from a PPF Account

6 MinsNov 11, 2022

Among financial investments, bank Fixed Deposits and Public Provident Fund (PPF) occupy an important place in the portfolio of most investors. This is because, unlike market-linked instruments, both these instruments offer secure and stable returns. That being said, there are some key differences between the two.  

Know how a Bank FD differs from a PPF Account

Differences between Bank FD and PPF

FeaturesBank FDPPF
Who can open itResident Individual & Non-IndividualResident Indians
Is joint holding possibleYes (not for non-individual entities)No
How is the Interest rate decidedAs set by the bankLinked to 10-year G-Sec yield and reviewed quarterly
What is the maturity/tenure periodFlexible as per customers requirement i.e. 7 days to 10 yearsFixed - 15 years
Is there a lock-in periodNo, except for 5-Yr Tax Saver FDYes, for the first 5 years
Are premature withdrawals permittedAllowed, except for 5-Yr Tax Saver FDAllowed after completion of 5 years in exceptional cases only
Suited forShort-to-medium term financial goals and contingency planningLong-term financial goals, viz. Retirement, Child’s future needs, etc.
Tax benefits5-Yr Tax Saver FD offers tax exemption on investment up to Rs 1.5 lakh u/s. 80C of the Income Tax ActOffers tax exemption on investment up to Rs 1.5 lakh under Section 80 C. Interest and maturity amounts are tax free

Bank FD

1. Useful to plan for short-to-medium term goals and contingencies:
When equity markets are volatile, the allocation to bank FDs may add stability to your investment portfolio. That’s why it makes sense even for risk takers to hold an optimal portion in bank FDs (in line with their asset allocation).

2. No lock-in:
There is no lock-in period, except in the case of a 5-Year Tax Saver FD. Choose your tenure to match your goals. This way you can avoid premature redemption and penalties.

3. Offers easy liquidity:
If you choose the plan, i.e. reinvestment of interest (also known as cumulative) or interest pay-outs (monthly, quarterly, etc.) and the tenure thoughtfully, a bank FD will ensure high liquidity.

4. Possible to follow a laddering strategy:
Laddering i.e. spreading your investments across different maturity buckets is possible with bank FD whereby it earns you slightly higher interest and your liquidity needs are taken care of.

5. Interest is taxable:
The interest earned on a FD is taxed as per Income Tax Act. The investment made in a Five-year Tax Saver FD is eligible for tax exemption under Section 80C of the Income Tax Act. You can know more about FD interest rates online.

[Also ReadNew to investing? Here’s why you should look at bank FDs]

Public Provident Fund

The Public Provident Fund Account or PPF is a long-term small saving scheme of the Central Government (framed under the PPF Act of 1968). The interest rate on the PPF account also is secure and stable. It is linked to the 10-year G-Sec yield and reviewed quarterly. Thus, the interest earned on the PPF Account may be subject to change. Here are the key features of the PPF Account.

1. Useful to plan for long-term financial goals:
For a long investment horizon of around 15 years, PPF is a worthwhile avenue. It is a useful tool in planning for your retirement corpus. It can also be used for planning for other long-term financial goals such as your child’s future needs, viz. higher education and wedding expenses.

2. Can’t hold multiple PPF Accounts:
As per current PPF rules, only one PPF account per individual is permitted; multiple PPF accounts cannot be opened. Furthermore, the account cannot be opened in a joint name.

3. Lock-in period:
The investments/contributions made into the PPF are subject to a lock-in period. Your money is blocked for the first 5 years and matures only after 15 years.

4. Limited liquidity:
Owing to the lock-in, liquidity is restrained when you invest in PPF. The withdrawal is limited only to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower, as per the PPF rulebook. Thereafter, you can make one withdrawal per year.

5. Tax efficient - enjoys an E-E-E status:
The contributions/investments you make to your PPF account every financial year entitle you to a deduction (from Gross Total Income) of up to Rs. 1.50 lakh under Section 80C. Further, the interest earned on the contributions made is tax-free, and so the maturity proceeds are exempt from tax. Even partial withdrawals PPF are exempt from tax.

Both bank FD and PPF are unique in their own way. From a portfolio diversification point of view, it makes sense to invest in both these avenues, irrespective of whether you are a risk-taker or a risk-averse investor. You can also use Axis Bank’s FD calculator and PPF calculator online!

Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. 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.