Reduction in PPF interest rate

Subject: Economy

Context:

According to a report, government is said to be considering a reduction in the Public Provident Fund (PPF) interest rates to below 7%.

Concept:

• When the PPF scheme was launched in 1968, the introductory rate of interest hovered at 4.68% for the first two years before inching upwards to 5% and beyond.
• However, the best years in terms of interest rates were between April 1986 and January 2000, ,the interest rate was constant at 12%.
• The PPF interest rates are linked to the 10-year government bond yield, which is fixed every quarter, based on the average bond yield in the previous quarter.
• Considering that since April 1, the 10-year bond yield has averaged 6.05% with the current yield at 5.85%. It’s highly likely that the PPF interest rate for the July-Sept quarter will fall to less than 7%.

About PPF

• The Public Provident Fund scheme is one of the most popular long-term saving-cum-investment products, mainly due to its combination of safety, returns and tax savings.
• Investors use the PPF as a tool to build a corpus for their retirement by putting aside sums of money regularly, over long periods of time (PPF has a 15-year maturity and the facility to extend the tenure). With its attractive interest rates and tax benefits, the PPF is a big favorite with a small saver.
• The PPF is popular because it is one of the safest investment products. i.e., the government of India guarantees investments in the fund.
• The interest rate is set by the government every quarter.
• PPF scores over many other investment options mainly because investment is tax exempt under section 80C of the Income Tax Act (ITA) and the returns from PPF are also not taxable.