The "RD or PPF which is better" discussion is a long one. Well, your decision depends on your financial goals, risk tolerance, and investment horizon. Both the Public Provident Fund (PPF) and Recurring Deposit (RD) are popular investment options in India, offering a different set of benefits and drawbacks. Delving deeper into each can guide you in making an informed choice that aligns with your financial preferences.
What is a Public Provident Fund (PPF)?
A PPF is a long-term investment scheme backed by India's government. It offers attractive interest rates, and risk-free and guaranteed returns with tax benefits, making it a popular choice for building long-term wealth and retirement planning.
It is well-known for its characteristics:
- Interest rate of 7.1% per annum
- Tax benefit of up to ₹1.5 lakh under Section 80C
- Investment can be started from ₹500 but a maximum ₹1.5 lakh per annum
- The minimum Investment tenure is 15 years which can be extended in blocks of 5 years
What is a Recurring Deposit (RD)?
An RD is a term deposit offered by banks and financial institutions. You invest a fixed amount of money monthly, the interest is compounded quarterly, and offers you fixed lumpsum returns. RDs offer moderate and assured returns for short-term and medium-term financial goals.
Recurring Deposits are known for their benefits -
- Minimum monthly investment - Axis Bank RDs can be opened with just ₹500
- Flexible tenure options from 6 months to 10 years
- Assured wealth generation by getting higher rates than Savings Accounts
Difference between PPF and RD
| Feature |
PPF |
RD |
| Objective |
Long-term wealth creation and retirement planning |
Short-term to medium-term savings goals |
| Meaning |
Government-backed savings scheme |
Term deposits offered by banks and financial institutions |
| Investible amount |
Minimum ₹500, Maximum ₹1.5 lakh per year |
Minimum ₹100 (varies across institutions) |
| Maximum investment |
₹1.5 lakh per year |
Varies across institutions (typically higher than PPF) |
| Interest rates |
Government-declared, currently at 7.1% per annum (subject to change on quarterly basis) |
Varies across institutions and tenure |
| Interest rate compounding |
Interest is compounded annually |
Interest is compounded quarterly or annually |
| Tax on interest earned |
Exempt under Section 80C of the Income Tax Act |
Taxable as per your income tax slab |
| Liquidity |
Limited liquidity - partial withdrawal allowed after 5 years |
Moderately liquid - premature withdrawal with a penalty |
| Income Tax Rebate u/s 80C |
Yes |
No |
| Maturity |
15 years, extendable in blocks of 5 years |
Varies across institutions (typically 1 - 10 years) |
| Premature Withdrawals |
Allowed after 5 years with a penalty |
Allowed with penalty |
| Loans |
Available after 3rd year and within the maturity period |
Available, depending on the institution |
| Risk |
Low risk, government-backed |
Low risk, but not government-backed |
| Periodic Income |
No |
No |
| TDS (Tax Deducted at Source) |
No |
Yes, for interest earned above ₹10,000 in a financial year |
RD vs PPF: Which one is better?
Which is better, PPF or RD? There is no definite answer to this question. The ideal choice depends on your -
- Investment horizon: If you have a long-term investment horizon (10+ years), PPF is a better option due to higher interest rates, tax benefits, and long-term wealth creation potential. For short-term goals (less than five years), RD offers higher liquidity and different interest rates based on tenure.
- Risk tolerance: Both PPF and RD are considered relatively low-risk investments. However, PPF comes with a government guarantee, offering an additional layer of security.
- Tax considerations: If you prioritise tax benefits, PPF offers tax exemption on investment amount (under Section 80C), interest earned, and maturity amount. RD interest is taxable as per your income tax slab.
- Financial goals: Align your choice with your goals. PPF suits long-term goals like retirement or a child's education, while RD aligns with short-term goals like building an emergency fund or buying a specific item within a few years.
Also Read: FD vs RD: What works best for you?
In summary, when comparing PPF vs. RD, both serve as key instruments for fortifying your financial stability. By discerning their distinctions and assessing your unique requirements, you can select the optimal choice to realize your financial objectives.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
