FD vs PPF– If you want to invest in PPF (Public Provident Fund) and FD (Fixed Deposit) for a period of 15 years and you are not able to decide which one to invest in, then here we will explain to you which one will give more returns in the long run.
PPF
Interest rate: Currently 7.1% p.a. (May be changed by the government every quarter, but we consider it stable).
Investment: Rs 1.5 lakh per annum (maximum limit).
Tenure: 15 years. Investment amount after 15 years if you invest Rs 1.5 lakh every year in PPF : Rs 1.5 lakh × 15 = Rs 22.5 lakh. With 7.1% p.a. interest, the total amount after 15 years, according to the PPF calculator, will be around Rs 40.68 lakh. Interest income: Rs 40.68 lakh – Rs 22.5 lakh = Rs 18.18 lakh (tax-free).
FD
Interest rate: For long-term (5-10 years), banks are currently offering 6.5-7.5%. We assume 7%.
Investment: Rs 1.5 lakh per year
Tenure: 15 years
Tax: Interest will be taxed as per your tax slab (10%, 20%, or 30%)
Strategy: Open a new FD of Rs 1.5 lakh every year as FD tenures are usually up to 10 years.
Invest Rs 1.5 lakh every year in a 15-year lump sum FD at 7% interest.
Investment amount: Rs 1.5 lakh × 15 = Rs 22.5 lakh. After 15 years, the total amount will be around Rs 41.32 lakh with 7% annual compounding.
Interest income: Rs 41.32 lakh – Rs 22.5 lakh = Rs 18.82 lakh.
If you are in the 30% tax slab, tax on 18.82 lakh = Rs 5.65 lakh.
Return: 41.32 lakh – 5.65 lakh = Rs 35.67 lakh.
If the FD rate is 7.5%, the pre-tax amount will be Rs 44.11 lakh, but even after tax it may be less than PPF.
Which is better?
Now the question is, If the tax slab is 20% or 30%, PPF will give higher returns as all the interest is tax-free. In FD, the net return is reduced due to taxes. If the tax slab is 10% or 0%, FD may be slightly better, provided the interest rate is 7.5% or more. Both are safe, but the tax exemption and EEE status in PPF make it better for the long term. If you don’t want to wait for 15 years and need to repay the loan quickly, choose FD (shorter term). But if the goal is 15 years (like for a home loan), then PPF is better, especially with the tax savings.