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Public Provident Fund (PPF) Vs. Fixed Deposits (FD)

The government announced a 0.1 per cent cut in interest rates on post office schemes. As a result, millions of small investors and those having Public Provident Fund (PPF) accounts will earn lesser on their savings. Post office time deposits ranging from one year to 5 years now offer interest rates of 8.2 to 8.4 per cent. These rates were in the range of 8.3 per cent to 8.5 per cent before the rate cut. Against this, bank deposits offer interest in the range of 8 to 9 per cent for these tenures.

However, in order to compare returns on post office schemes vis-à-vis bank deposits, one needs to consider the tax impact. Let’s specifically consider the 5-year deposit. The interest on 5-year post office time deposits as well as bank deposits is taxable. Clearly, a higher rate available with bank deposits will help improve the return. Besides, both these deposits are eligible for a tax deduction under section 80C of the income tax act up to Rs 1 lakh.

Bank deposits also score on another count. Withdrawals from a bank deposit are far easier and less cumbersome as compared to post office deposits. Besides, if you withdraw your post office deposit within a year, you will receive interest at the savings bank rate, which is presently 4 per cent. In case of bank deposits, you receive interest at the rate applicable to the period for which you retained the deposit. For example, if you have a 2-year deposit with a bank which you withdraw after say 3 months, you will earn interest at the rate applicable for a 3-month deposit.

Clearly, bank deposits make more sense both in terms of return and liquidity.

PPF (Public Provident Fund) Vs. FD (Fixed Deposit)

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