FDs Vs Small Savings Schemes: Where should you invest and why? | Mint

If you are contemplating investing in either fixed deposit (FD) or a small savings scheme, then it is advisable to compare their returns along with other benefits they offer.

Typically, a fixed deposit (FD) offers anywhere between 6.7 to 7 percent per annum to depositors whereas other tax saving schemes offer slightly higher.

For instance, PPF offers 7.1 percent per annum, as per the prevailing interest rates. On Senior Citizens Savings Scheme, depositors are entitled to receive 8.2 per cent per annum. 

On Sukanya Samriddhi Account, one can earn up to 8.2 percent a year, there is 7.7 percent return on National Savings Certificate and 7.5 percent return on Kisan Vikas Patra.

Tax savings

Another pertinent point that investors should consider is that in the new tax regime – which also happens to be the default regime – taxpayers are not entitled to claim an exemption on their investment.

This means when you invest, say ₹1.5 lakh in PPF and other small savings schemes, the income invested will not receive any special treatment and it will be taxable just as investment in a term deposit.

Howevever, the income earned on these investments in later years will be tax free unlike interest on fixed deposit.

If you fall in the low tax bracket or zero tax bracket, it does not make much of a difference. But those who fall in the 30 percent income tax bracket tend to lose nearly one-third of third of their interest income when they lock money in a fixed deposit. Those in the 20 percent tax bracket will lose one-fifth of their income in form of taxes in case of fixed deposit.

Preeti Zende, Founder of Apna Dhan Financial Services believes that each investment product has its unique features and advantages and should be chosen accordingly. “

“Fixed deposits are the most suitable product for short-term goals i.e., with an investment horizon of 2 to 3 years,” she says.

“PPF is a long-term wealth creation product that offers a sovereign guarantee and tax-free return as a debt portfolio for your long-term goal. It offered tax benefit under the old tax regime. But even if you have opted for the New tax regime, you should continue investing in PPF as part of retirement goal products. Additionally, NSC is also a good product that offers a sovereign guarantee for principal and interest that can be used for mid-term goals at smaller tax rates,” Ms Zende adds.

Chartered Accountant Deepak Gupta of PD Gupta & Company offers similar advice as he says while PPF is better choice for long term wealth generation, FDs is better for short term investing. 

“For long-term, tax-efficient growth, PPF is the better choice, whereas FD suits short-term needs and those in lower tax brackets. So, while both PPF and Fixed Deposit (FD) are popular investment options, they serve different purposes,” says Gupta.

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Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.