PPF vs FD
One is tax-free and locked for 15 years; the other is taxed and flexible. The post-tax gap is far bigger than it looks.
On the surface this looks close: PPF pays ~7.1%, a good bank FDA bank deposit locked for a fixed term at a fixed rate. pays ~7%. But one of those numbers is tax-free and the other is fully taxable at your slab — and once you apply that, the “similar” rates are nowhere near each other.
PPF is EEE — exempt on the way in (80CA tax deduction of up to ₹1.5 lakh for set investments. deductionAn amount subtracted from income before tax., old regime), exempt while growing, exempt on withdrawal. FDA bank deposit locked for a fixed term at a fixed rate. interest is taxed at your slab, every single year, with TDS. For someone in the 30% bracket, a 7% FDA bank deposit locked for a fixed term at a fixed rate. is really a 4.9% FD; the PPF’s 7.1% stays 7.1%. That ~2.2-point gapA jump between one bar’s close and the next bar’s open., compounded over PPF’s 15-year life, is enormous: ₹1.5 lakh/year for 15 years grows to roughly ₹40.7 lakh in PPF vs ~₹33 lakh in an FD after 30%-bracket tax — a ₹7-8 lakh difference for choosing the tax-free wrapper on the same kind of asset (government-grade fixed incomeA loan to a government or company that pays fixed interest.). What the FD buys you instead is flexibility: any tenure from 7 days to 10 years, break it anytime for a small penalty. PPF’s price is the 15-year lock (partial withdrawals only from year 7, loans from year 3). So: PPF is the debt portion of your retirement money; FDs are for dated, medium-term needs.
- PPF — ~7.1% fully tax-free (EEE), sovereign-backed; ₹1.5 lakh/year cap; 15-year lock (partial withdrawal from year 7); 80CA tax deduction of up to ₹1.5 lakh for set investments. deductionAn amount subtracted from income before tax. in the old regime.
- FDA bank deposit locked for a fixed term at a fixed rate. — any amount, any tenure, breakable with a small penalty; interest taxed at slab yearly + TDS; insured up to ₹5 lakh (DICGC).
- Post-tax reality (30% bracket) — PPF 7.1% vs FDA bank deposit locked for a fixed term at a fixed rate. ≈ 4.9%: compounded over 15 years, a gapA jump between one bar’s close and the next bar’s open. of several lakhs on identical contributions.
- Role — PPF = the safe core of retirement money; FDA bank deposit locked for a fixed term at a fixed rate. = parking for goals with known nearer dates.
ExampleTwo 30-year-olds each commit ₹12,500/month to “safe” saving. Anil uses PPF: at 7.1% tax-free he has ~₹40.7 lakh at 45, tax-free. Sunil (30% bracket) uses FDs at 7%: after yearly tax his effective rate is ~4.9%, reaching only ~₹32-33 lakh — and every year he’s filed and paid tax on interest he never spent. Same discipline, same “safe fixed incomeA loan to a government or company that pays fixed interest.” — the wrapper alone cost Sunil ₹7-8 lakh.
Common mistake“PPF is better, so all my money should go there.” PPF’s edgeA repeatable, structural reason your trades win over time. only exists for money that can genuinely stay 15 years (and ₹1.5 lakh/year is the ceiling anyway). Money for a car in 3 years or a house deposit in 5 does not belong in PPF — the lock-in that powers its compoundingEarning returns on your returns — growth that accelerates over time. becomes a trap for dated goals. Match the instrument to the date, not to the headline “winner”.
Test yourselfA 7% FD and 7.1% PPF look similar. For a 30%-bracket saver, what’s the real gap?
The FD’s 7% is taxed at slab every year → ~4.9% post-tax; PPF’s 7.1% is fully tax-free (EEE). Compounded over 15 years of ₹1.5 lakh/year, that’s roughly ₹40.7 lakh vs ~₹33 lakh — a ₹7-8 lakh difference from the tax wrapper alone.
✓ You learnedPPF at ~7.1% tax-free crushes a similar-rate FDA bank deposit locked for a fixed term at a fixed rate. once slab tax is applied (a 7% FDA bank deposit locked for a fixed term at a fixed rate. is ~4.9% post-tax in the 30% bracket) — worth several lakhs over 15 years of identical contributions. The FD’s virtue is flexibility for dated, medium-term goals; PPF’s lock-in makes it the natural safe core of retirement savings, up to its ₹1.5 lakh/year cap.
FAQs
Is PPF still worth it under the new tax regime (no 80C deduction)?
Usually yes. The 80C deduction is only one of PPF’s three tax exemptions — even without it, the interest accrues tax-free and the maturity is tax-free, which is what creates the big post-tax gap over FDs. Under the new regime you lose the entry-year deduction but keep the part that matters most over 15 years: tax-free compounding.