PPF vs FD vs ELSS: Lock-in, Returns, Tax and Risk

PPF gives a government-backed, tax-free return with a 15-year lock-in; a bank FD gives a fixed return that is fully taxable, with flexible tenure; and ELSS gives market-linked equity returns with the shortest lock-in of the three, 3 years, but no guarantee. Under the old tax regime, PPF, ELSS and a 5-year tax-saver FD all share the same ₹1.5 lakh deduction limit. The right mix depends on your goal, time horizon and how much volatility you can tolerate.

The three options in brief

PPF (Public Provident Fund)

A small savings scheme run by the Government of India through post offices and authorised banks.

• Rate: 7.1% a year for October–December 2026. The government reviews small savings rates every quarter.
• Deposits: ₹500 minimum and ₹1.5 lakh maximum per financial year.
• Tenure: 15 years from the end of the financial year of opening, extendable in blocks of 5 years.
• Liquidity: Loans from the third to the sixth financial year; partial withdrawals from the seventh, within limits.
• Interest calculation: Interest is calculated monthly on the lowest balance between the 5th and the last day of the month and credited yearly, so deposits made by the 5th earn interest for that month.

Fixed deposit (FD)

A deposit with a bank or NBFC at a rate fixed for the tenure.

• Rate: Set by each bank and changes with RBI policy and bank funding needs. Senior citizens usually get an extra margin.
• Tenure: From 7 days to 10 years. Only a 5-year tax-saver FD qualifies for the deduction, and it cannot be broken early or pledged for a loan.
• Safety: Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, covering principal and interest together. Proposals to raise this cover have been reported, so check DICGC's site for the current figure.

ELSS (Equity Linked Savings Scheme)

A mutual fund category that invests mostly in equities and carries a tax benefit.

• Return: Market-linked. No guaranteed or fixed return.
• Lock-in: 3 years from the date of each investment. With a SIP, each instalment has its own 3-year lock-in.
• Investment: No upper limit to invest, but only ₹1.5 lakh a year counts for the deduction.

PPF vs FD vs ELSS: comparison table

How each is taxed in FY 2026-27

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered many sections. The rules for these three products are largely unchanged, but the section numbers you will see in forms and broker statements are new.

The ₹1.5 lakh deduction

The deduction formerly under old Section 80C is now under Section 123 of the Income-tax Act, 2025, read with Schedule XV, which lists eligible instruments including PPF, ELSS and 5-year tax-saver FDs. The overall cap remains ₹1.5 lakh a year, shared with EPF, life insurance premiums, home loan principal and others.

This deduction is available only under the old tax regime. Under the new regime, which is the default, investing in PPF or ELSS gives no deduction. To weigh this choice, read new vs old tax regime, and for the full list of eligible instruments see tax-saving options under 80C.

At a 30% slab plus 4% cess under the old regime, a full ₹1.5 lakh deduction saves ₹1,50,000 × 31.2% = ₹46,800 a year (before any surcharge).

Tax on the returns

• PPF: Interest and maturity amount are fully exempt, under both regimes.
• FD: Interest is added to your income and taxed at your slab rate every year, whether or not you receive it. Banks deduct TDS under Section 393 of the new Act (old Section 194A) at 10% (with PAN) once interest from that bank crosses ₹50,000 in a year, or ₹1 lakh for senior citizens. TDS is not the final tax; you pay the balance at your slab rate.
• ELSS: Gains on units held over 12 months are long-term (ELSS units always are, because of the 3-year lock-in). They are taxed at 12.5% on gains above ₹1.25 lakh a year, plus cess (old Section 112A). See capital gains tax on mutual funds.

Worked example: ₹1.5 lakh a year for 15 years

Assume you invest ₹1.5 lakh at the start of every year for 15 years (₹22.5 lakh in total), you are in the 30% slab under the old regime, and you compare three routes. The FD and ELSS rates are illustrative assumptions, not forecasts; the PPF rate is held at today's 7.1% for simplicity, though it can change each quarter.

The formula for a yearly deposit at the start of each year is: FV = P × [((1 + r)^n − 1) ÷ r] × (1 + r)

1. PPF at 7.1%, tax-free FV = 1,50,000 × [((1.071)^15 − 1) ÷ 0.071] × 1.071 ≈ ₹40,68,209 Interest earned: about ₹18.18 lakh, all tax-free.

2. Tax-saver FDs at an illustrative 6.5%, renewed every 5 years Interest is taxed yearly at 31.2% (30% + cess), so the effective post-tax rate is 6.5% × (1 − 0.312) = 4.472%. FV ≈ 1,50,000 × [((1.04472)^15 − 1) ÷ 0.04472] × 1.04472 ≈ ₹32,50,215 after tax (approximate, assuming tax is paid from the deposit each year).

3. ELSS at an illustrative 10% a year FV = 1,50,000 × [((1.10)^15 − 1) ÷ 0.10] × 1.10 ≈ ₹52,42,459 before tax. Gains: ₹52,42,459 − ₹22,50,000 = ₹29,92,459. If all units were redeemed in one year: (₹29,92,459 − ₹1,25,000) × 12.5% × 1.04 ≈ ₹3,72,770 tax. After tax ≈ ₹48,69,690. Redeeming over several years would use the ₹1.25 lakh exemption more than once.

In all three cases you also get the same ₹46,800 a year of tax saving under the old regime, so it does not change the ranking. What changes the ranking is the ELSS assumption: at an average below roughly 7.8% a year instead of 10%, the post-tax ELSS figure would fall below the PPF figure (at 7.5% it would be about ₹39.73 lakh). Equity returns over any 15-year window are uncertain, and ELSS can lose value over shorter periods.

To model different PPF deposit patterns or a different rate, use the PPF calculator.

Which one suits which goal

Choose PPF if you want a guaranteed-safety, tax-free corpus for a long goal such as retirement and can leave money untouched for 15 years. It also works well for the debt portion of a portfolio. Its rate is set by the government and can move, so treat 7.1% as the current rate, not a promise.

Choose an FD if you need certainty over a short or medium period, for example an emergency fund, a down payment in two years, or regular income for a retiree. Use a 5-year tax-saver FD only if you are in the old regime and cannot use PPF or ELSS. For higher-slab taxpayers, FD interest loses a large share to tax.

Choose ELSS if you are in the old regime, need to fill the ₹1.5 lakh limit, have a long horizon and can tolerate equity swings. It has the shortest lock-in among deduction-eligible products, though the 3 years are a minimum, not a recommended holding period.

Many investors combine them, for example PPF for the stable part and ELSS for growth, within the shared ₹1.5 lakh limit, plus regular FDs for short-term needs.

Key takeaways

• PPF: 15-year lock-in, 7.1% for Oct–Dec 2026 (reset quarterly), fully tax-free returns, sovereign-backed.
• FD: flexible tenure, fixed rate, interest fully taxable at slab; 5-year tax-saver FD qualifies for the deduction but cannot be broken.
• ELSS: 3-year lock-in per investment, market-linked returns, LTCG at 12.5% above ₹1.25 lakh a year.
• The shared ₹1.5 lakh deduction (old Section 80C, now Section 123) applies only under the old tax regime.
• In an illustrative 15-year example, PPF beat a post-tax FD comfortably; ELSS came out ahead only because of an assumed 10% return that is not guaranteed.
• Match the product to the goal and time horizon, not just the headline return.