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June 26, 2020

PPF interest rate speculated to fall below 7% Know Interest on all Govt Small Saving Scheme

by Mahesh Mara in Compliance Law

PPF interest rate speculated to fall below 7% Know Interest on all Govt Small Saving Scheme

The Public Provident Fund (PPF) is one of the most popular investment option in India. A PPF scheme is ideal for individuals with a low risk appetite.It is a long-term investment scheme for individuals who want to earn high but stable returns. PPF investments come with the following benefits to the investor:-

  1. As the PPF is backed by the Government of India, one of the most significant PPF account benefits is that it is entirely risk-free. The returns, too, are guaranteed by the government.
  2. One of the most important benefit of the PPF is its tax exempt status. The amount you invest up to Rs. 1,50,000 is deductible from your taxable income, the interest you earn is non-taxable and the maturity amount you get after 15 years is also tax exempt. This makes it one of the most tax efficient investments.
  3. The maturity of a PPF account is of 15 years. PPF account holders have the benefit of flexibility of tenure. When your PPF account matures after 15 years, account holder will have two options – withdraw the entire amount or extend the tenure in blocks of five years.
  4. Although the PPF has a 15-year lock-in period, from the 7th year, you can make partial withdrawals from your account. Besides, partial withdrawals, you can prematurely close your PPF account if you need the funds for severe medical treatment or for higher education.
  5. The PPF allows a lot of flexibility in the investment amount. Every year, you can invest a minimum of Rs. 500 and a maximum of Rs. 1,50,000. You can make these investments in a maximum of 12 instalments or as a lump sum.

According to PPF rules, the interest is calculated on a monthly basis but it is credited into the account at the end of financial year on March 31. Interest becomes payable for that month if the deposit is made before the 5th of that month.

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The government on 31 March 2020 announced a steep cut in the interest rates on small savings schemes for the first quarter (April to June) of FY 2020-21. Interest rates on various small savings schemes have been cut by between 70 basis points and 140 basis points (100 basis points = 1%). 

% Change in Small Savings Schemes Interest Rates

InstrumentInterest rate (%) – 01.01.2020Interest rate (%) – 01.04.2020Change (%)
Savings deposit440
1 year Time Deposit6.95.5-1.4
2 year Time Deposit6.95.5-1.4
3 year Time Deposit6.95.5-1.4
5 year Time Deposit7.76.7-1
5 year Recurring Deposit7.25.8-1.4
5 year Senior Citizen Savings Scheme8.67.4-1.2
5 year Monthly Income Account7.66.6-1
5 year National Savings Certificate7.96.8-1.1
Public Provident Fund7.97.1-0.8
Kisan Vikas Patra7.66.9-0.7
Sukanya Samriddhi Yojana8.47.6-0.8

The interest rate of small savings schemes are linked to government bond yields of the same maturity. The PPF rate is linked to the 10-year government bond yield. The rate does not change on a daily basis, it is announced at the beginning of each quarter based on the average bond yield in the previous quarter. For the current April-June quarter, the rate was fixed at 7.1% at the end of March when the 10-year bond yield averaged 6.42% in the January-March quarter. 

India 10Y Bond Yield was 5.88% on Tuesday June 23, according to over-the-counter interbank yield quotes for this government bond maturity which clearly means a rate cut is in the offing for small savings schemes. The India 10 Years Government Bond reached a maximum yield of 8.182% (11 September 2018) and a minimum yield of 5.772% (10 June 2020). The bond yield has been showing a declining trend for the past couple months which would lead to a decline in the PPF interest rates too.

Investors should brace for the fall in Public Provident Fund (PPF) rate below the 7% mark. The consistent decline in bond yields means the rates of small savings schemes are likely to be cut when they come up for the quarterly revision next week. If rates are cut as expected, this would be the first time since 1974 that the PPF rate will fall below 7%. Investors need to act fast and lock themselves at higher rates before the rate cut. NSCs, Senior Citizen Saving Scheme and KVPs bought before the rate cut will continue to give the contracted rate till maturity. However, investments in the PPF and Sukanya schemes will get affected. 

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