Whether it is to plan for your retirement or build an emergency fund for a rainy day, savings are an important aspect of our lives. For decades, India has been a nation of savers. Most of us aim to spend less than our incomes and save the maximum amount to invest smartly and further grow our savings. Fortunately for us, we have plenty of good investment options to choose from.
In this blog, we are going to look at two popular investment tools namely PPF schemesand fixed deposits. We then look at the features and benefits of both, compare PPF v/s FD and decide which one is the better pick.
1. What is a Fixed Deposit (FD)?
Fixed deposit schemes are low-risk investment instruments offered by banks and NBFCs. They serve as a great tool to grow your savings. You can choose to deposit a lumpsum amount as per your financial capacity and select a tenure at your convenience. Your deposit starts earning a pre-decided rate of interest. This rate of interest remains unaffected by market fluctuations and the money is guaranteed on your deposit.
2. Fixed Deposit: Features and Benefits
Fixed deposits offer the following features and benefits:
- Flexible tenure:Based on your investment goals, you can either opt for short-term or long-term fixed deposits. The tenure can range from anywhere between 7 days to 10 years.
- Guaranteed returns: The FD interest rates do not depend on the market situation and remain fixed at the rate you booked the FD. This ensures guaranteed returns on maturity.
- Higher gains: Cumulative FDs compound the interest on a monthly, quarterly, or half-yearly basis. This guarantees higher gains on the principal amount.
- Regular source of income:For some FDs, you get the option of monthly payouts that can act as a steady source of income.
- Benefits for senior citizens: Most banks offer higher fixed interest rates on FDs for senior citizens. This can help them accumulate larger savings.
- Tax Saving:Tax-saver fixed deposits can help you bring down your income tax liability. You can claim a tax exemption underSection 80Cof the Income Tax Act, 1961 for a sum of up to ₹1,50,000. Furthermore, it falls under the Exempt-Tax-Exempt category.
3. How to Open a Fixed Deposit (FD) Account
There are two modes of opening a fixed deposit account – online and offline.
Online process:
The pros of opening an FD account include easy payment, less time-consuming, easy closure, and quick renewal. Here is the online procedure for opening an FD account:
- Visit the website of the NBFC or the bank you want to open an FD account.
- Log in with an existing ID or create a new login ID.
- Choose the open FD account option.
- Provide required details such as tenure, nominee, principal amount, etc.
- Confirm the details and make the payment through net banking.
- Remember to download the receipt for future reference.
Offline Process:
You can visit your nearest bank branch and fill out an application form for opening an FD account. If you have an already existing account with the bank, you need not submit the KYC documents again. However, in case of a new account, you must take all the necessary documents for identity and address proof to complete your KYC.
4. How is Interest Calculated in FD?
Let us understand how fixed deposit interest is calculated:
The FD interest rate formula is listed below
A = P(1+r/n)^n*t
Where,
A: is the maturity amount
P: is the principal amount
r: is the rate of interest
t : is the number of years
n: is compounded interest frequency***
You can always use an online FD calculator to know your interest/returns within a few minutes.
5. What is a Public Provident Fund (PPF)?
For the uninitiated, Public Provident Fund means an investment-cum-tax-saving instrument backed by the government. It was introduced over 50 years ago by the Ministry of Finance and continues to be a preferred investment option even today. Since PPF is guaranteed by the government, it is completely secure. You can opt for a PPF from the Indian post office or a designated bank that offers the same.
6. PPF Features and Benefits
Here are some of the primary features and benefits of the Public Provident Fund Scheme:
- Tenure:PPF has a minimum tenure of 15 years. It can be extended in blocks of 5 years if you wish.
- Investment limit:PPF minimum amount for investment starts from ₹500. The maximum amount in PPF that can be invested is ₹1.5 lakhs in a financial year.
- Tax-saving:Investments made under PPF are eligible for tax deduction up to ₹1.5 lakhs per year inclusive of all investment instruments under Section 80C of the Income Tax Act, 1961.
- Deposit frequency:Individuals must deposit into their PPF account at least once in a year for 15 years.
- Mode of deposit:Individuals can make deposits into their PPF accounts via cash, cheque, online fund transfer or through a demand draft.
- Nomination:When you open a PPF account, you get the option to make a nomination either at the time of opening the account or subsequently.
- Government-backed:Since PPF is backed by the government, it ensures a risk-free return along with complete capital protection. The element of risk is very minimal.
7. How to Open a PPF Account
You can open a PPF account in any post office or designated bank. Individuals are required to fill out the application form and submit the necessary documents to open the account. Plus, you can transfer the account from the post office to the bank’s branch of your preference by submitting a request for the same.
8. How is Interest Calculated in PPF?
As per PPF Rules, PPF interest is calculated every month and credited into your account at the end of the financial year. Interest to be accrued on deposits is compounded yearly.
9. Maturity or Lock-in Period of PPF and FD
When it comes to FDs, they have a very flexible tenure. It starts from 7 days and goes up to 10 years. Only tax-saving FDs have a lock-in period of 5 years. For the rest, investors can choose the investment tenure as per their financial needs.
On the other hand, PPF has a lock-in period of 15 years. However, partial withdrawals can be made after the completion of six years (i.e. from the seventh year) from the end of the year in which you made the initial investment. Moreover, you can only withdraw an amount that is lower of the two – 50% of the balance at the end of the fourth financial year or 50% of the balance at the end of the preceding year. Compared to FDs, they offer lesser investment flexibility.
10. Loan Availability on PPF v/s FD
Let us compare PPF v/s FD loan availability:
Loan against fixed deposit:
You can avail of a loan against FD at any point in time. The top banks offer a loan in the range of 85% to 90% of the fixed deposit amount. In case the borrower fails to repay the loan, the banks can recover it from the fixed deposit amount which acts as collateral security.
Loan against PPF:
The loan against the public provident Fund is available only from the 3rd financial year of investment till the 6th year after opening the PPF account. The loan amount is restricted to 25% of the balance available in the PPF account at the end of the 2nd year preceding the year in which the loan has been applied. The loan has to be repaid within 36 months of availing it in a maximum of 36 EMIs. You can take a second loan before the end of the 6th financial year provided your first loan is fully settled.
11. Difference between PPF and FD
Let us compare both the investment instruments i.e. PPF and FD to analyze which option is better:
| Parameters | Fixed Deposit (FD) | Public Provident Fund (PPF) |
|---|---|---|
| Issuing authority | NBFCs and Banks | Government of India |
| Minimum Deposit Amount | ₹100 to ₹1000 | ₹500 |
| Liquidity | Moderate liquidity | Low liquidity |
| Tenure | 7 days – 10 years (20 years in the case of some banks) | 15 years (extendable in a block of 5 years) |
| Eligibility | Residents, HUFs, Trust, Corporation Firms, etc. including NRIs | Indian Residents |
| Joint Account | Allowed | Not allowed |
| Interest Rate | FD interest rates range from 2.90% to 9.05% | Currently, the PPF interest rate is 7.1% |
| Loan against Deposit | Available | Available only after 3rd financial year |
| Premature withdrawal | Allowed for certain FD types | Allowed from 5th financial year |
| Taxation benefit on deposits made | Tax exemption up to ₹1.5 lakh u/s 80 C for tax-saving FDs | Deposits qualify for deduction under section 80C as per IT Act. However, Section 80C allows for a maximum deduction of ₹1.5 lakhs per year inclusive of all investment instruments. |
| Tax on Interest Earned | Yes | Fully exempt from income tax |
12. FD or PPF: What Should You Pick?
Both FD and PPF are good options for risk-averse investors. PPF is preferred by people who are looking to save taxes along with investing for the future. Due to the government backing, the security it provides is unmatched. Also, the fact that the interest you earn is also tax-free adds to its attractiveness However, it comes with an extremely long lock-in with limited withdrawal options, that too from the 7th year.
FDs on the other hand are comparatively more liquid and give you the flexibility of deciding the tenure. The tax-saving FDs have a lock-in of 5 years, which is much lesser than PPF. But FDs go carry some risk and also the interest you earn is taxable.
So, if you are ok with a 15-year lock-in then PPF can be a good option keeping all things in mind.
13. Frequently Asked Questions
What is the difference between a bank FD and a company FD?
A bank fixed deposit is offered specifically by banks. Corporate or company fixed deposits are investment instruments issued by non-banking financial institutions and companies. Company or corporate FD rates are usually higher compared to bank FD interest rates. However, corporate FDs are unsecured, meaning they do not have any deposit insurance coverage.
What is the basic process of premature corporate FD withdrawal?
Corporate fixed deposits can be liquidated or broken before maturity either at the NBFC’s or company’s physical branch or online through their website. The basic process for premature withdrawal of corporate fixed deposits will require you to submit:
1. The original fixed deposit receipt with all holder’s signatures
2. A canceled cheque
3. A request letter from the client with the reason for the withdrawal
4. This can also be completed online by submitting the required documents and proofs on the company/NBFC website.
When can the client apply for premature corporate FD withdrawal?
An investor can apply for a premature corporate FD withdrawal at any time, subject to certain stipulations. In many cases, a penalty is levied for early liquidation. You may also have to forgo a part of the interest. Some NBFCs and companies have a minimum lock-in period of 3 months.
Can you apply for a company FD online?
Yes. Any investor can apply for a company fixed deposit online after completing basic KYC requirements with the company. ET Money has the option through which you can apply to company FDs
How to apply for a company FD?
To buy a company FD online, visit the company’s or NBFC’s website. Submit proofs to complete KYC requirements (Latest passport photograph, proof of identity, proof of address, and copy of signature) and purchase the FD. You can also buy a company FD through ET Money instantly in a 100% paperless way.
What are the things to keep in mind while choosing Company Fixed Deposit?
Consider the following when choosing a corporate FD:
1. The credit rating of the company from CRISIL, ICRA, or CARE.
2. Company FD rates of interest provided by the instrument.
3. The financial history and standing of the company offering the deposit.
4. Past repayment history.
What is the minimum tenure for a company FD?
The minimum tenure for a corporate FD is usually 12 months or one year.
What are the different interest payment options of company FDs?
Corporate FDs in India provide both cumulative and non-cumulative interest payout options. The cumulative option pays interest at maturity, along with the principal invested. Non-cumulative interest can be paid monthly, quarterly, half-yearly, or annually.
What is the mode of interest payment in company FD?
Cumulative or non-cumulative.
What are the tax implications?
Interest earned from corporate FDs is taxed at the applicable income tax slab rate if the amount exceeds ₹5,000 in a year.
