PPF vs FD: Which Earns More After Tax? A 15-Year Comparison

PPF and fixed deposits are the two places most Indian savers park money they don't want to risk. On the headline rate they often look almost the same. After tax, and once you account for how each one compounds and how long your money is locked up, they can be very different. This guide computes both side by side with the same deposits, shows where the gap comes from, and explains the cases where an FD is still the better tool.

How PPF interest works

The Public Provident Fund is a government-backed savings scheme with a 15-year term. You can deposit between ₹500 and ₹1,50,000 per financial year. The interest rate is set by the government and reviewed every quarter; it has been 7.1% a year for several years now, but always check the current notification before relying on it.

The rules on interest are specific. Interest is calculated monthly on the lowest balance between the 5th and the last day of each month, and the total is credited once a year on 31 March. That means a deposit made on the 4th of a month earns interest for that month, and one made on the 6th doesn't. If you deposit the full ₹1.5 lakh once a year, doing it between 1 and 5 April earns interest on it for all twelve months.

That's the model the PPF Calculator uses. With ₹1,50,000 a year for 15 years at 7.1%, you deposit ₹22,50,000 and end with about ₹40,68,209. The interest earned, roughly ₹18,18,209, is completely tax-free.

How FD interest works

Bank fixed deposits usually compound quarterly. A quoted rate of 7% therefore grows faster than 7% simple interest. The effective annual yield is:

So ₹1,00,000 in a 5-year FD at 7%, compounded quarterly, becomes 1,00,000 × (1.0175)²⁰ ≈ ₹1,41,478. You can check this in the FD Calculator, which lets you switch between monthly, quarterly, half-yearly and annual compounding to see how much the frequency matters. (Not much: the gap between quarterly and monthly compounding at 7% is a few hundred rupees on ₹1 lakh over five years.)

FD rates vary by bank, tenure and whether you're a senior citizen. The 7% used throughout this guide is an assumption to keep the comparison clean, not a quote from any bank.

The comparison everyone gets wrong: tax

PPF has what's called EEE status: the deposit can qualify for a deduction under Section 80C (in the old tax regime), the interest is tax-free, and the maturity amount is tax-free. FD interest is added to your income and taxed at your slab rate every year, whether or not you withdraw it.

So the useful comparison isn't 7.1% against 7%. It's 7.1% against what the FD leaves you after tax. Using the 7.186% effective FD yield, and including the 4% health and education cess on the tax:

In the 30% slab, an FD would need to yield over 10% a year to match PPF after tax. Few, if any, mainstream banks offer that on regular deposits. In the 0% slab, though, the FD comes out marginally ahead on yield, and with much more flexibility.

Fifteen years, side by side

Here's the same ₹1,50,000 a year for 15 years in each option. For the FD, assume each year's deposit is rolled into FDs at the same 7.186% effective yield and that tax is paid each year out of the interest, so the money compounds at the post-tax rate.

For someone in the 30% slab, the PPF ends about ₹6.86 lakh ahead on the same deposits. For someone with no taxable income, the FD is about ₹30,000 ahead, which is less than 1% of the final amount. The tax treatment, not the headline rate, decides this comparison.

Where the FD still wins

• PPF money is locked for 15 years. Partial withdrawals are allowed only from the seventh financial year, and only up to a limit. Loans against the balance are possible in years three to six. An FD can be broken any time, usually for a small penalty on the interest rate.
• If you need the money in two or five years, PPF doesn't fit at all. An FD laddered to the goal date does.
• PPF caps deposits at ₹1.5 lakh a year. Anything above that has to go somewhere else.
• For senior citizens and low earners, higher senior-citizen FD rates combined with little or no tax can make FDs match or beat PPF, without the lock-in.

The old-regime deduction, in rupees

If you file under the old tax regime and haven't already filled your Section 80C limit with EPF, insurance premiums or ELSS, a PPF deposit also cuts your tax bill in the year you make it. At the 30% slab plus 4% cess, a ₹1,50,000 deposit reduces tax by 1,50,000 × 31.2% = ₹46,800. At the 20% slab it's ₹31,200. Over 15 years at the 30% slab, that's ₹7,02,000 of tax saved on deposits, on top of the tax-free interest.

Many salaried people find that EPF contributions alone already use most of the ₹1.5 lakh limit, in which case PPF adds no extra deduction. Check your Form 16 or salary slip before counting this benefit.

Using both together

PPF and FDs aren't really competitors. They solve different problems. A common split is to put long-term, tax-sensitive savings into PPF up to the yearly limit, and keep an emergency fund of a few months' expenses in FDs or a sweep-in account that you can reach within a day. The FD's lower post-tax return is the price of that access, and for an emergency fund it's worth paying.

Safety, briefly

PPF is backed by the Government of India. Bank FDs are covered by DICGC deposit insurance up to ₹5 lakh per depositor per bank, including interest. Above that, you're relying on the bank itself. Spreading large FD amounts across banks keeps each one inside the insured limit.

Limitations of this comparison

• Rates aren't fixed for 15 years. PPF's rate can change every quarter, and it applies to the whole balance, not just new deposits. FD rates are locked only for each deposit's tenure. Both projections assume today's rates hold.
• The 80C deduction isn't included. In the old regime, a ₹1.5 lakh PPF deposit can reduce taxable income, which makes PPF even better for those taxpayers. Under the new regime, which is the default, that deduction isn't available, and the table above already reflects that case.
• Deposit timing matters for PPF. The calculator assumes the deposit goes in by 5 April. Depositing late in the year, or in monthly instalments, earns less interest than shown.
• Surcharge, TDS mechanics and inflation are ignored. At 6% inflation, even the PPF's 7.1% is only about 1% a year in real terms.

This guide explains how the numbers work. It isn't personal financial advice, and Toolminex isn't a licensed adviser. Tax rules change with each Budget, so confirm current rules before deciding.