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PPF vs FD: Compare Them After Tax, Not Before

By Pradipta Ray · Published

Comparing a PPF rate with an FD rate side by side is the most common mistake in Indian personal finance. One of those returns is taxed at your income slab and the other is not taxed at all.

PPF falls in the exempt-exempt-exempt category: the deposit qualifies for a deduction under section 80C, the interest is exempt under section 10(11) of the Income Tax Act, and the maturity amount is not taxed. Fixed deposit interest is added to your income and taxed at whatever slab you fall in, with TDS deducted once it crosses the annual threshold.

A 7.5% FD in the 30% slab keeps about 5.25% after tax. A 7.1% PPF keeps 7.1%. The headline rate is the wrong comparison, and it favours the wrong product.

The same money, both ways

Here is ₹1,50,000 a year for fifteen years - the PPF limit - against an FD ladder at a higher rate, with FD interest taxed at the 30% slab.

₹1,50,000 a year for 15 years: PPF at 7.1% against an FD ladder at 7.5%, with FD interest taxed at 30%.
PPFFD ladder
Total deposited₹22,50,000₹22,50,000
Interest earned₹18,18,209₹20,40,406
Tax on the interest₹0₹6,12,122
In your hands at the end₹40,68,209₹36,78,284
₹1,50,000 a year for 15 years: PPF at 7.1% against an FD ladder at 7.5%, with FD interest taxed at 30%.

The FD is paying a higher rate and compounds quarterly rather than annually, and it still ends up behind once the tax is paid. That is what a 30% slab does over fifteen years.

Where the FD wins

The comparison flips in three situations, and they are common ones.

  1. You are in a low or nil tax bracket. With no tax on the interest, the higher FD rate is simply the higher rate, and the FD wins.

  2. You need the money before fifteen years. PPF locks it. Partial withdrawals are allowed from the seventh year and there are loan provisions from the third, but an FD can be broken next week for a penalty. Liquidity is worth something real.

  3. You have already used your ₹1.5 lakh PPF limit. The limit is per financial year across all your PPF accounts. Beyond it, the comparison is moot.

What the compounding frequency adds

FDs compound quarterly at most Indian banks, PPF credits interest annually. That difference is real but small, and it is nowhere near enough to close a 30% tax gap.

₹5,00,000 at 7.5% for 5 years. Same quoted rate throughout; only the compounding changes.
CompoundingEffective yieldMaturity valueInterest
Yearly7.5%₹7,17,815₹2,17,815
Half-yearly7.64%₹7,22,522₹2,22,522
Quarterly7.71%₹7,24,974₹2,24,974
Monthly7.76%₹7,26,647₹2,26,647
Paid out, not compounded7.5%₹5,00,000₹1,87,500
₹5,00,000 at 7.5% for 5 years. Same quoted rate throughout; only the compounding changes.

The spread between yearly and quarterly compounding on the same quoted rate is a few thousand rupees over five years. The spread between taxed and untaxed interest, on the same numbers, is several times that.

Doing the comparison properly

  1. Convert the FD rate to after-tax. Multiply it by (1 minus your slab rate). A 7.5% FD in the 20% slab is 6% after tax; in the 30% slab it is 5.25%.

  2. Compare that against the PPF rate directly. PPF is already after tax.

  3. Then ask when you need the money. If the answer is inside fifteen years, the rate comparison may not be the deciding factor at all.

  4. Remember both rates move. PPF is revised quarterly by the government; FD rates are reset by banks whenever they like. A fifteen-year projection at today's rate is an illustration, not a forecast.

Run your own PPF, with the deposit-date rule appliedPPF Calculator

They are not really competitors

PPF is a fifteen-year, tax-free, government-backed commitment with a hard annual limit. An FD is a flexible, taxed deposit you can open for six months or six years at any amount. Most people who can use PPF should fill it first and hold an FD for money they may need sooner - which is a sequencing answer, not a winner.

And if you have not looked at the PPF deposit-date rule, do that before optimising the rate. It is worth more than the difference between most PPF and FD rates - see why your PPF deposit date changes your maturity value.

Frequently asked questions

Is PPF interest really tax-free?
Yes. PPF is in the exempt-exempt-exempt category: the contribution is deductible under section 80C, the interest is not taxed, and the maturity amount is not taxed. That is why comparing its rate directly with an FD rate understates it.
How much tax do I pay on FD interest?
It is added to your income and taxed at your slab rate. Banks deduct TDS once the interest crosses the annual threshold, but the TDS is not the final liability - if your slab is higher, the balance is due when you file.
What FD rate would match PPF at 7.1%?
In the 30% slab, roughly 10.1% before tax. In the 20% slab, about 8.9%. In the 5% slab, about 7.5%. Those are the rates an FD would need to leave you with the same money, which is why the comparison matters.
Can I withdraw from PPF before 15 years?
Partially, from the seventh financial year, subject to limits, and there are loan provisions from the third to the sixth year. It is not liquid in the way an FD is - an FD can be broken almost immediately for a penalty of around 0.5% to 1%.
Should I put everything in PPF then?
You cannot - the limit is ₹1,50,000 per financial year across all your PPF accounts. And money you may need within fifteen years does not belong in a fifteen-year lock-in whatever the rate. Fill the PPF limit if the horizon fits, and hold shorter money elsewhere.

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