Fixed Deposit (FD) vs Employees Provident Fund (EPF)

Fixed Deposit (FD) offers fixed returns with low risk, while Employees Provident Fund (EPF) provides retirement savings with tax benefits.

Published Feb 13, 2025 4 Min Read

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When it comes to saving for the future, Indians have a variety of options to choose from. Two of the most popular and trusted savings avenues are Fixed Deposits (FDs) and the Employees' Provident Fund (EPF). While both are widely used for securing financial stability, they cater to different needs and offer distinct benefits. In this article, we will explore the key differences between FDs and EPF, their advantages and disadvantages, and how they fit into your overall financial planning.

FD vs. EPF: Understanding the differences and benefits

What is a Fixed Deposit (FD)?

A Fixed Deposit (FD) is a financial instrument offered by banks and financial institutions where you deposit a lump sum of money for a fixed period at a predetermined interest rate. FDs are known for their safety and reliability, as they offer guaranteed returns over the chosen tenure. The interest rate is fixed at the time of deposit, and it remains unchanged throughout the period, regardless of fluctuations in market rates.

Key features of FDs:

Tenure: FDs offer flexibility in tenure, ranging from as short as 7 days to as long as 10 years or more.
Interest rates: The interest rates on FDs are generally higher than those on regular savings accounts and are fixed at the time of deposit.
Payout options: Interest can be paid out at regular intervals (monthly, quarterly, or annually) or compounded and paid out at maturity.
Premature withdrawal: FDs can be withdrawn before the maturity date, but this usually incurs a penalty in the form of reduced interest.

What is the Employees' Provident Fund (EPF)?

The Employees' Provident Fund (EPF) is a retirement savings scheme mandated by the Government of India for employees in the organised sector. Under the EPF scheme, both the employee and the employer contribute a portion of the employee's salary to the EPF account. The accumulated corpus, along with interest, is available to the employee upon retirement or under certain conditions, such as resignation or death.

Key features of EPF:

Mandatory contribution: For employees earning up to Rs. 15,000 per month, it is mandatory for both the employee and the employer to contribute 12% of the basic salary and dearness allowance to the EPF account.
Interest rate: The interest rate on EPF is determined annually by the government and is generally higher than regular savings account rates. As of the latest update, the EPF interest rate is around 8.25% per annum(as of August 2024).
Tax benefits: Contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act. Additionally, the interest earned, and the maturity amount are tax-free, provided certain conditions are met.
Long-term investment: EPF is a long-term investment aimed at building a retirement corpus. Withdrawals before retirement are allowed under specific circumstances, such as purchasing a home, paying for medical expenses, or in case of unemployment.

FD vs. EPF: Key difference between FD and EPF

To help you better understand the differences between Fixed Deposits and EPF, let us compare them based on several key factors:

Feature	Fixed Deposit (FD)	Employees' Provident Fund (EPF)
Purpose	Short- to medium-term savings and investment	Long-term retirement savings
Tenure	Flexible, ranging from 7 days to 10 years or more	Long-term, typically until retirement
Interest Rate	Fixed at the time of deposit, generally 5% to 10% per annum. Bajaj Finance offers interest rate up to 8.85% p.a.	Variable, set annually by the government, currently around 8.25% per annum (as of August 2024)
Payout Options	Periodic interest payouts or compounded and paid at maturity	Interest is compounded and added to the EPF balance annually
Premature Withdrawal	Allowed with penalty	Allowed under specific conditions, such as home purchase or medical emergencies
Tax Benefits	Interest is taxable; no tax benefits on the principal	Contributions, interest earned, and maturity amount are tax-free under certain conditions
Risk	Low risk, backed by the creditworthiness of the financial institution. For example Bajaj Finance FD holds AAA rating from financial agencies like CRISIL and ICRA	Low risk, backed by the Government of India
Contribution	Lump sum deposit, no mandatory contributions required	Mandatory contributions for eligible employees and employers
Liquidity	Medium liquidity: premature withdrawals incur penalties	Low liquidity: withdrawals are restricted to specific conditions

Also read: How to Activate Your UAN Number

What to choose: EPF or FD

Short-term vs. long-term goals: If you are looking for a safe place to park your money for a short to medium term, an FD might be the better option due to its flexibility and guaranteed returns. However, if you are focused on long-term retirement savings, the EPF scheme is a more suitable choice due to its higher interest rates and tax benefits.
Liquidity needs: If you anticipate needing access to your funds in the near future, an FD with a shorter tenure would be more appropriate. On the other hand, if you can afford to lock in your savings for a longer period, the EPF's restrictions on withdrawals should not be a concern.
Tax considerations: If tax efficiency is a priority, the EPF scheme offers significant advantages with its tax-free contributions, interest, and maturity amount. In contrast, the interest earned on FDs is fully taxable, which can reduce your overall returns.
Risk tolerance: Both FDs and EPF are low-risk investment options, but FDs offer more flexibility in terms of tenure and liquidity. If you prefer a fixed return with easy access to your funds, an FD might be more suitable. However, if you are focused on increasing your retirement corpus with minimal risk, the EPF scheme is an excellent choice.

Conclusion

Both Fixed Deposits and the Employees' Provident Fund play important roles in a comprehensive financial plan. While FDs offer flexibility, safety, and guaranteed returns for short- to medium-term goals, the EPF scheme is a robust tool for long-term retirement savings with added tax benefits. Understanding the differences between these two options will help you make informed decisions that align with your financial objectives and ensure a secure

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Frequently asked questions

Is FD better than EPF?

FDs are more flexible and adaptable to your financial goals and needs. EPF, on the other hand, is a retirement planning instrument that offers decent interest rates, tax benefits u/s 80(C), and employer contributions. As an investor, you can diversify your investment with both FD and EPF to create a balanced approach.

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As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
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