In terms of capital protection, both PPF and tax saver FDs by post office and bank score high. Post-office term deposits come with sovereign guarantee from the Indian Government whereas bank deposits of those listed as scheduled banks by the Reserve Bank of India (RBI) are insured up to Rs 5 lakh under DICGC, an RBI subsidiary.
The DICGC insurance program covers cumulative deposits of each depositor in fixed, recurring, current and savings accounts of up to Rs 5 lakh with each scheduled bank in case of bank failure.
PPF and Fixed Deposit Interest Rates
Public Provident Fund offers an interest rate of 7.1% p.a., which is higher than most banks FDs and post office term deposits. The highest tax saver FD rates offered by public and private sector banks currently go upto 5.30%-6.75% p.a. Some small finance banks have been offering 6.25%-7.25% p.a. interest rates on tax saver FDs. Post office five year term deposits currently offer an interest rate of 6.7% p.a.
Taxability of returns on PPF and Fixed Deposit
When it comes to taxability of returns, PPF outscores tax saver FDs. The interest income generated by FDs is taxed as per the applicable tax slab of the depositor. Whereas in case of PPF, the interest income and maturity proceeds are totally tax-free, making its post-tax returns one of the highest ones amongst all fixed-income tax-saving instruments.
One crucial parameter where tax saver FDs outscore PPF is in terms of liquidity. While tax saving FDs come with a lock-in period of 5 years, PPF investments get locked in for 15 years. Having said that, PPF allows partial withdrawals and premature closure. Partial withdrawals are allowed only once in a year, starting from the 7th year of subscription whereas premature closure is permitted after 5 years for specific purposes.
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Also, loan against PPF deposits can be availed from 3rd year to 5th year, but only upto 25% of the balance available at 2 years prior to loan application year.
(Expert comments by Sahil Arora - Director, Paisabazaar.com)
