Public Provident Fund (PPF) V/s Tax Saving Fixed Deposit

As the Financial year comes to end our tension increase for tax saving. Sometimes we confused that which saving option is better out of available options viz. Tax saving Term Deposit, PPF (Public Povident Fund), Life insurance, Medical Insurance, NSC, Rajiv Gandhi Equity Saving Scheme  etc.

Here we are discussing PPF (Public Provident Fund) and Tax Saving FD.

We all have heard a lot about PPF Account and seen our parents make investment but what is PPF Interest Rate in India and what are the benefits of Investing in this form of Instrument? This is one question which usually crops up in our minds and in this article we’ve tried to explain the basics and the benefits of investing in this form of Tax-Saving Instrument

What is PPF?

PPF Account refers to Public Provident Fund Account and is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid by Govt. Any Individual in India (whether Salaried or Self-Employed or any other category) can invest in this scheme and can earn a good tax-free return on the same. 

PPF Account can be opened in any Post Office and some authorised branches of Banks. Non Resident Indians (NRI’s) are not allowed to subscribe to PPF Account. If someone opens a PPF Account while he is a Resident of India but subsequently becomes a NRI, shall be allowed to continue investing in his account.

PPF Account can be opened on behalf of a minor either by father or mother. A person cannot open PPF Account on behalf of a minor as grand parent.

Maximum and Minimum deposit in PPF each year

As per the Public Provident Fund Scheme framed by the Govt. of India, the Maximum amount that can be deposited in a PPF Account every year is Rs. 1,50,000 (from AY 2015-16) and the Minimum amount to be invested in PPF in India every year is Rs. 500

This amount may be paid in 12 monthly installments or in lump-sum at the option of the Account Holder. Earlier HUF were allowed to open PPF Account but now HUF’s are not allowed to open PPF Account. RBI has announced that if any HUF had opened a PPF Account prior to 13th May 2005, they would be entitled to continue and would be closed on expiry of 15 years from the date of opening the account.

PPF Interest Rate

The PPF Interest Rate is decided by the Govt. of India. From the F.Y. 2013-14 interest rate declined by 0.10% from 8.80%. Now new interest rate is 8.70%. For the FY 2014-15 interst rate kept unchanged.

The PPF Interest Rate is computed for a calendar month on the basis of the lowest balance in an account between the close of the 5^th day and the end of the month and the Interest on PPF Account is credited to the account of the account holder at the end of the year.

Tenure of PPF Account

PPF in India can be closed at any time after the expiry of 15 years from the date on which a/c was opened. The whole amount in this account can be withdrawn at the time of Closure. For Closure procedure, the account holder shall apply in ‘Form C’ and furnish the Pass Book of his PPF Account.

Extension of PPF Account – However, on the expiry of 15 years, the Account holder can also apply for extension of duration for a further time period of 5 years. In case an account holder opts for extension of period of PPF Account, he shall also be eligible for Partial Withdrawal by applying in ‘Form H’, subject to the condition that the total of the withdrawals during the extended 5 years shall not exceed 60% of the balance in his account at the time of extension.

Pre-Mature Withdrawal from PPF – There is a lock-in period of 5 years in a PPF Account and an Account Holder can withdraw money only at the end of the 5^th year. The maximum withdrawl can be 50% of the amount that stood in his account (whichever is lower amongst the following two): -

• At the end of 4^th year or
• At the end of the previous year in which withdrawal is sought to be made

If the Account Holder has borrowed any amount against this PPF balance, it shall also be deducted from the above figure computed above.

Loans on PPF Account

Loan facility is available from 3rd financial year upto 5th financial year. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2011
A fresh loan is not allowed when a previous loan or interest is outstanding. Interest Rate is 2% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment can be made either in lump-sum or in Installments.

Benefit of Investing in PPF – Taxation of PPF

1. Benefits U/sec. 80C – The Investments made in PPF Account in India are eligible for deduction u/s 80C
2. Tax Free Income–  Interest received on PPF is Tax Free.

Points to Note

1. Each individual is eligible for only for 1 PPF Account per person.
2. A PPF Account can only be opened in Individual’s Name and not in a Joint Name. A nominee must be appointed for the PPF Account. In case death of the Account Holder, the nominees can't make any further contribution in the case of the death of the deceased.
3. If the Account holder dies and no nominee has been appointed by him, the amount deposited in his PPF Account would be awarded to his Legal Heirs.

Tax Saving Fixed Deposit: A Bird Eye View

The following guidelines have been laid out by the Finance Ministry for Investments in Tax Saving Fixed Deposit.

Maturity: 5 years

Minimum Investment: Rs. 100 and in multiple thereof

Maximum Investment: Rs. 1,00,000

Maximum Benefit: 100% of Investment

Deduction available to: Individual, HUF

Premature Withdrawal: Not Available

Loan Facility against this FD: Not Available

Interest Rate: As offered by the Bank from time to time. During FY 2014-15 it is between 8.25%-9.25%.

Tax on Interest earned: As per the Income Tax Slab Rates of the Individual

TDS on Interest @ 10%: If Interest amount exceeds Rs 10000.

The Interest Rate to be paid on these Tax Saving Fixed Deposit is decided by the Bank with whom the Investment has been made and most banks are paying Interest in the range of 8.5%-9.50%.

Effective Annualised Interest Rate on Tax Saving Fixed Deposit

The following table shows the effective Interest earned taking into account the Tax Benefit on such fixed deposits assuming 8.5% Interest Rate

S. No.	Particulars	Amount in Rs.
		Slab Rate - 30%	Slab Rate - 20%	Slab Rate - 10%
A	Amount Invested	10,000	10,000	10,000
B	Immediate Tax Saving (assuming 30% Slab Rate)	3090	2060	1030
C	Effective Investment (A-B)	6910	7940	8970
D	Maturity Amt of Original Investment (Interest @8.5% p.a.)	15228	15228	15228
E	Total Pre-Tax Benefit on Deposits (D-C)	8318	7288	6258
F	Effective Annual Yield (5 years)	16.64%	13.91%	11.17%

For making Investments in these types of Tax Saving Fixed Deposits which are allowed as deduction under Section 80C, the investor is required to submit an application for the same while making the deposit and shall also furnish copy of his PAN Card to the Banker.

These Investments can either be made in Single Name or in Joint Name. In case the Investment is being made in Joint Name, only the 1^st holder is eligible to claim deduction and the 2^nd holder cannot avail of deduction for section 80C for Investment in this type of Tax Saving Fixed Deposit.

Difference between making Investment in PPF vs Tax Saving Fixed Deposit

Both PPF as well as Tax Saving Fixed Deposit are regular income earning investments wherein a pre-determined assured return is given to the Investor. Moreover, an Investor can also claim deduction of a maximum of Rs. 1,50,000 for Investing in any of these Investments.

However, there are some differences as well between PPF and Tax Saving Fixed Deposit which have been discussed below:-

Particulars	Tax Saving Fixed Deposit	PPF
Maturity	5 years	15 years
Deduction available u/s 80C	Rs, 1,00,000	Rs. 1,50,000
Interest Rate	Fixed by the Bank*	Fixed by the Govt*
Compounding	Yearly	Quarterly
Tax on Interest earned	As per Income Tax Slab Rate	Exempt
Premature Withdrawl Facility	Not Allowed Maturity after 5 years	Available from 5th year onwards but only to a certain extent
Loan Facility	Not Allowed Maturity after 5 years	Can be availed from 3rd year onwards
Eligible Entities	Individual & HUF	Individual

PPF Account   Vs  Tax Saving Fixed Deposit

Another Fixed Interest earning Investment which is allowed to be claimed as deduction under Section 80C is Tax Saving Fixed Deposit. Both PPF and Tax Saving Fixed Deposits are allowed as deduction under Section 80C upto a maximum limit of Rs. 1,00,000 p.a.

The maturity of Tax Saving FD is 5 years as compared to maturity of PPF Account which is 15 years. But the interest earned on Tax Saving Fixed Deposit is taxable as compared to interest earned on PPF which is tax free.

 (*Although the interest on Tax Saving FD and PPF are fixed by different bodies, they are almost the same with only a slight difference)

Thus, the major difference between Tax Saving Fixed Deposit and PPF is that the Maturity of Tax Saving FD is 5 years which is much less than the maturity of PPF which is 15 years. The whole amount can be withdrawn from Tax Saving FD after 5 years whereas amount only to a certain extent can be withdrawn from PPF from 5^th year onwards. Loans are also available on PPF from the 3^rd year onwards whereas this facility is not available on Tax Saving FD and amount can be withdrawn only from 5^th year onwards.

Another major difference is that Tax is payable on the Interest earned on Tax Saving FD whereas the Interest earned on PPF is Tax Free. Thus the major difference between PPF and Tax Saving Fixed Deposit is of its Maturity and the fact that tax is payable on interest earned on Tax Saving FD whereas the Interest earned on PPF is tax free.

As the Interest on PPF is tax free, the effective interest on PPF turns out to be higher than the effective interest on Tax Saving FD. However, the added interest also comes with higher maturity. But in case of Tax saving FD if you invest every year after 5 years, every year you will get a lump sum amount which you can use or reinvest, which is not possible in PPF.

Therefore for someone who can invest in an instrument with a longer maturity, PPF is advisable and for someone who prefers shorter maturity, Tax Saving Fixed Deposit is advisable