FD versus PPF after tax
Fixed deposits and PPF both promise a known return with no market risk, but they are not competing for the same money. The deciding factors are tax and liquidity, and they point in opposite directions.
Tax turns a close race into a rout
A 7% fixed deposit is taxed at your slab rate every year as the interest accrues. For someone in the 30% bracket that leaves about 4.8% after tax. PPF interest at 7.1% is tax-free, so the full 7.1% is yours.
That gap of over two percentage points compounds for fifteen years. On the same annual contribution, the difference in final corpus runs into lakhs — entirely because of tax treatment rather than any difference in the underlying rate.
Liquidity points the other way
A fixed deposit can be broken any time for a small penalty, used as collateral for a loan, and opened for any amount and tenure you like. PPF locks money for fifteen years, allows partial withdrawal only from the seventh year, and caps contributions at ₹1.5 lakh a financial year.
So the two products answer different questions. PPF is for long-term money you can genuinely leave alone; an FD is for money you may need, or for amounts beyond the PPF ceiling.
Rate certainty differs too
An FD locks its rate for the full tenure on the day you open it. The PPF rate is reviewed quarterly by the government, so a fifteen-year projection at today’s rate is an assumption, not a contract.
Historically the PPF rate has drifted downwards, which argues for a conservative assumption when planning long-term goals around it.
How most people should use both
A common approach is to fill the ₹1.5 lakh PPF limit first for long-term debt allocation, keep an emergency fund in short fixed deposits or a liquid fund, and use FDs for specific goals within the next few years.
If you are in a low tax bracket or have opted for the new regime with little to deduct, the tax advantage narrows and the choice becomes more about lock-in than returns.
Post-tax comparison at 30% slab
- FD nominal rate
- 7.00%
- FD after 30% tax and cess
- ≈ 4.82%
- PPF rate
- 7.10% (tax-free)
- PPF effective advantage
- ≈ 2.3 percentage points
- FD lock-in
- Your choice, breakable with penalty
- PPF lock-in
- 15 years, partial withdrawal from year 7
For long-term money, PPF wins comfortably after tax. For money you might need within a few years, the FD’s flexibility is worth more than the extra return.