FD For Senior Citizens: FD VS PPF: Which is a better investment?

Before you decide to invest in a fixed deposit (FD) or a public provident fund (PPF), you must understand how these instruments differ. For a senior citizen, investing in a fixed deposit almost always makes more sense as the 15-year lock-in period of the PPF may be a bit too long for them. On the other hand, when building a corpus for your retirement – PPF may be a great choice, depending on your risk appetite and other portfolio investments. Let us look at how PPF and FD compare on various parameters.

Interest rate

The fixed deposit interest rates varies based on the tenure of the deposit and the institute/bank offering the deposit. At present, it varies from a low of 7% per annum to a high of 8.5% per annum. Once you make the deposit, the interest rate till maturity is locked in. 

The interest rate earned by PPF is announced every quarter by the Government of India. For the current quarter, it is set at 7.9% per annum. It was set to 8% per annum last quarter. While the interest is calculated for every quarter, it is compounded annually. 

Lock-in period

A fixed deposit does not have a lock-in period. The only exception is a tax-saving FD which has a lock-in period of 5 years. The maturity period of an FD can be chosen to be as low as 7 days to as high as 10 years. PPF, on the other hand, has a lock-in period of 5 years and a maturity period of 15 years. On maturity, you can choose to withdraw the funds, extend it for another 5 years with or without adding in more amount. This is ideal when working with a long-term horizon.

Premature withdrawal

Other than tax-saving FD, all fixed deposits allow for a premature withdrawal whenever you require. In case of such a withdrawal, a penalty of 0.5% to 1% on agreed fixed deposit interest rate is charged. Tax-saving fixed deposits do not permit any premature withdrawal before five years.

PPF allows a partial withdrawal after the 5-year lock-in period has lapsed. You can withdraw up to 50% of the previous year’s balance or the 4th year balance – whichever is lower. Only one withdrawal is permitted per year.

Tax implications

The interest earned on fixed deposits is taxable as per the tax slab you fall under. Tax-saving FDs are eligible for deduction under Section 80C of the Income Tax Act. PPF is tax-exempt under Section 80C at the time of deposit, the interest earned and the amount received on maturity are also tax-exempt.

Loan facility

Both fixed deposits and PPF savings can be pledged as collateral for loans. The loan amount against fixed deposit can be for up to 80% to 90% of the FD value. You can take up to 25% of PPF balance as a loan under the loan facility offered in the scheme. The tenure of this loan cannot be longer than three years. This facility is only available from the third year.

Fixed deposit and PPF both are investment products that you should consider. For most senior citizens, FDs may be a better option because of the easy liquidity compared to PPF. PPF is a good option when building a corpus for retirement at a younger age.

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