From Bonds, FDs To PPF: 5 Fixed Income Investment Options Compared

Can I ask you a question? Don’t worry, it's not a complex mathematical problem. Just a simple one- Whenever the stock market feels noisy and makes your portfolio bleed red, what’s the one thing you secretly wish for? I am sure it must be about having some part of your portfolio that offers stability and predictability, right?

Well, that’s exactly where fixed income comes in. They add the much-needed layer of diversification to your portfolio, acting like ‘calm in the chaos’, providing that much-needed stability to your portfolio, protecting it from market volatility.

So today, we deep dive into 5 popular fixed-income investment options that you can consider adding to your portfolio for more stable and predictable returns. We’ll also compare each of them on key parameters such as risk, liquidity, returns, and taxation.

1. Fixed Deposits

Do they even need an introduction? FDs are perhaps the most popular investment options in our country. They offer stability in returns as their interest rate is locked for the entire FD tenure.

As far as liquidity is concerned, banks and NBFCs usually offer an instant withdrawal option, though it comes with a penalty of around 0.5%-1%.

The interest rates on FDs currently range around 3%-8% across various banks and NBFCs. Moving onto the taxation part, the interest on FDs is added to your ‘other income’ and gets taxed as per your income tax slab. 10% TDS also gets deducted if your interest income exceeds Rs 50,000 in a financial year.

Also, one thing that gives bank FDs an edge over NBFCs, although the latter often offers slightly higher FD rates, is that bank deposits are covered under DICGC, a subsidiary of RBI. This DICGC cover is not extended to NBFC’s deposits. (Read more about the DICGC insurance HERE)

2. Bonds

While the stock market often steals the spotlight in India, not many investors are aware that our country also has a ₹238 lakh crore bond market. Certainly not a small number!

But what exactly are bonds? Simply put, when you buy a bond, you are lending money to the issuer- be it a company, government, municipality, or a corporation. In return for your invested money, the issuer promises to pay you a specified rate of interest (called as coupon) during the tenure of the bond, and repay the principal (known as the face value or par value of the bond), when it reaches maturity.

There are two major categories of bonds in which you can invest:

• Government Bonds

The central and state governments in India issue government bonds to fund public projects such as schools or roads, cover budget deficits, or implement social welfare programs. Though their interest rates usually tend to be around 5.5%-7%, they can sometimes go up to around 8%-9%, with the interest being payable mostly on a quarterly or half-yearly basis.

For instance, these two government bonds on an OBPP platform are offering returns of around 8%-9%.

Coming back to government bond’s safety, the reason they are regarded highly for their safety is that the government itself backs these bonds. Moreover, you can start investing in government bonds for as low as Rs 100, and their tenures range widely from as short as 2-3 months to as long as 40-50 years.

• Corporate Bonds

Corporate bonds are the bonds issued by public or private companies incorporated in India. Moreover, a company incorporated in India, but part of a multinational group, can also issue corporate bonds. A statutory corporation like the LIC (Life Insurance Corporation) is also eligible to issue corporate bonds in India.

In return for your invested money, the issuer gives you periodic interest payments and eventually your principal (the money you invested) back, when the bond matures at the end of the tenure.

Interest rates on corporate bonds generally range around 9%-14%, payable monthly, yearly, half‐yearly or quarterly. Their tenure can range from 2-3 months to 5-6 years.

As far as liquidity is concerned, some bond platforms do offer the flexibility to sell the government or corporate bond before maturity. However, it is dependent on finding a buyer for the bond, which is not always guaranteed.

Coming to the taxation rules, they vary for government bonds and corporate bonds.

For government bonds, interest income gets added to your ‘income from other sources’ and is taxed as per your income tax slab. As far as capital gains are concerned, STCG is taxed as per your tax slab rate (holding period less than 1 year), and LTCG is taxed at 12.5% (holding period equal to or more than 1 year).

For corporate bonds, the taxation depends on whether it is a listed or an unlisted bond.

For listed bonds: STCG taxed as per your tax slab rate (holding period less than 1 year), LTCG taxed at 12.5% (holding period equal to or more than 1 year).

For unlisted bonds: W.e.f. July 23, 2024, all unlisted bonds are treated as short-term assets, regardless of holding period. So, they get taxed as per your applicable slab rate.

Also, 10% TDS on interest earned is levied on government bonds as well as both listed and unlisted bonds.

3. SDIs (Securitized Debt Instruments)

Another fixed-income investment option is Securitized Debt Instruments (SDIs). Think of SDIs like mutual funds, but for loans.

Wait, wait, they are not as complex as they sound. Let’s simplify it.

First, a bank or NBFC bundles its existing pool of loans, such as gold or car loans. Then it partners with an arranger like Grip Invest to convert this pool into investible units. This pool is then transferred to an SPV- Special Purpose Vehicle, which is backed by collateral.

An independent SEBI-registered trustee monitors this overall structure, while a credit rating agency assigns a rating to the SDI. Once all this is done, the SDIs are listed and offered to investors. As and when borrowers keep repaying the loans of the pool, a servicer (could be the originator or arranger or a third-party) collects those payments, passes them through the SPV, and distributes the interest and principal to investors at the said frequency.

When it comes to liquidity, SDIs are not amongst the most liquid fixed income options, mainly because the Indian debt market is not that mature yet. As far as returns are concerned, SDIs offer around 12%-14%, with tenures ranging from around 6 months to 4 or 5 years.

It's noteworthy that SDIs are a regulated fixed-income product in India. Their regulation is primarily overseen by SEBI, which introduced the regulatory framework in 2008, and has undergone several amendments to adapt to changing market conditions and investor needs.

Additionally, the RBI was the one who established guidelines for securitisation in 2006, which eventually laid the groundwork for the securitisation process that SEBI later regulated.

Taxation of SDIs involves the interest income getting taxed as per your applicable slab rate, whereas TDS of 10% (w.e.f. 1st April 2025) is also deducted.

4. PPF (Public Provident Fund)

It’s a no-brainer that PPF is one of the safest investment options in India, given that both the principal as well as interest components are backed by the sovereign guarantee of the government of India. A big advantage that PPF holds is that the principal invested, interest earned as well as the maturity amount are all completely tax-free.

The interest rate on this fixed income investment option has remained unchanged at 7.1% p.a. since April 2020, but the Finance Ministry does review it on a quarterly basis.

Perhaps the biggest drawback of PPF scheme is its lower degree of liquidity due to its long lock-in period of 15 years. But it does offer some degree of liquidity in the form of facilities such as partial withdrawals and premature closure, subject to certain terms and conditions stated under Public Provident Scheme, 2019.

For instance, partial withdrawal can be only be done 5 years after opening the PPF account, and even then you can withdraw up to 50% of the balance. As far as premature withdrawal is concerned, full withdrawal can be done after 5 years of opening the account, but only with a valid reason. A 1% reduction in interest rate would also be applicable in such a case.

You can read it in detail here: https://www.nsiindia.gov.in/(S(kbf2jq45myxpidf530jbhd45))/InternalPage.aspx?Id_Pk=169

5. EPF (Employee Provident Fund)

If you are a salaried employee, you are most likely contributing towards EPF every month. EPF is managed by the Employees' Provident Fund Organisation (EPFO) and is a compulsory deduction from employees' salaries in eligible organisations.

The employee needs to make EPF contributions of 12% of the basic salary + dearness allowance per month.

However, EPFO has put a wage ceiling of ₹15,000 for mandatory EPF membership. So the employees having basic pay of up to Rs 15,000 are included in EPF. Those with higher than Rs 15,000 basic pay can become EPF members voluntarily.

Coming back to the monthly contribution for members with basic pay within the ceiling of Rs 15,000, the contribution would be 12% of (basic pay + DA). Suppose your basic pay + DA is Rs. 10,000, your mandatory contribution would be 12% of it, which is Rs 1,200. Whereas if you have the pay of Rs 15,000 (which is the upper limit), your contribution would come out to be Rs 1,800.

So, given that Rs 15,000 is the maximum wage ceiling for mandatory contribution, an employee’s maximum contribution becomes Rs 1,800 for EPF account.

If you have a higher-than-Rs 15,000 pay and want to contribute a higher amount, you can do that as well. Employees can voluntarily contribute a higher amount of up to Rs 15,000, but the employer is not under any obligation to pay at such a higher rate.

Remember that the employer needs to match the employee’s mandatory contribution, but not the voluntary one. Moreover, for organisations with less than 20 employees, the mandatory contribution requirement is 10%, not 12%.

As far as EPF's interest rate is concerned, it was declared as 8.25% p.a. for FY24-25, whereas the interest rate for the ongoing FY25-26 is yet to be declared. The interest gets credited to the employee’s EPF account at the end of the financial year.

Coming to the taxation part, the interest on an employee's contribution to an EPF account was tax-free until the government introduced new tax rules in FY21-22’s Union Budget.

April 1st, 2021 onwards, EPF contributions above Rs 2.5 lakh during a financial year will be taxable in the hands of the employee. This interest is also subject to TDS of 10% (20% if you do not provide PAN). Note that these new taxation rules have been applicable only on employees’ contributions and not to those made by the employer.

Now you may wonder, if the upper limit is Rs 1,800 per month (which makes the annual contribution Rs 21,600), when will the Rs 2.5 lakh contribution come into the picture? Well, that would happen if you voluntarily contribute a higher amount through VPF (voluntary provident fund). That contribution goes into your EPF account only, it's just that an added contribution goes towards your EPF.

As far as withdrawals are concerned, the EPFO had recently made changes to the withdrawal rules in October 2025.

Key highlights are these:

1. Partial withdrawal conditions simplified: The existing 13 types of partial withdrawal provisions have been merged into a unified framework of 3 categories:

• Essential needs cover purposes such as illness, education, marriage

• Housing covers buying, building, or repaying loans on a house

• Special circumstances cover unfortunate situations like natural calamities or unforeseen financial stress due to reasons like job loss.

2. Withdrawal amount increased: Before the simplification of norms, EPF members were allowed to withdraw only their own (i.e. employee) contribution and interest. Now, the withdrawable amount will also include the employer contribution.

3. Uniform tenure for withdrawals: Earlier, the eligibility to withdraw depended on how long you worked, such as 3 years, 5 years or even 7 years. EPFO has now removed these varying eligibility periods. All kinds of withdrawals now have a uniform eligibility period of 12 months, irrespective of the reason.

4. Mandatory retention of contribution: To avoid repeated withdrawals that resulted in insufficient EPF balance at the time of retirement, 25% of the contribution now needs to be mandatorily retained to ensure a respectable corpus at retirement.

But in case you unfortunately become unemployed, 75% of the balance (including employer and employee contributions and interest earned) can be withdrawn immediately, while the remaining 25% can only be withdrawn after one year.

As far as risk is concerned, EPF is considered a very low-risk investment option, given that it is a government-backed social security scheme, administered by the EPFO, under the Ministry of Labour & Employment.

A Quick Comparison Of These 5 Fixed-Income Investment Options

Conclusion

In the end, we can conclude that each of these popular fixed-income investment options has its own set of features, risks, returns potential, etc, and the decision to choose amongst these depends on the investor’s financial goals, investment horizon, risk appetite and return expectations.

For example, investors aiming for long-term stability and high tax benefits can opt for PPF and EPF, as these two offer the lowest risk despite low liquidity.

Whereas investors who have a low risk appetite and prefer a high level of liquidity can go for fixed deposits (FDs).

For investors who are seeking high returns (of up to 14%-15%) and are willing to take moderate risk, they can go for corporate bonds and SDIs.

On the other hand, government bonds can be a suitable low-risk investment option for those who are seeking a safe fixed-income investment option beyond the regular FDs.