Akash Jha
Due to the tax benefit the plan provides, a senior government official has stated that the government has “consciously” not changed the rate of interest on the Public Provident Fund (PPF) in step with increases in market interest rates.
Interest generated in the PPF is not taxed, and contributions up to Rs 1.5 lakh per year are tax deductible under Section 80C of the Income Tax Act, making it one of the most popular modest savings instruments of the government. The present interest rate, which has not changed in over 3.5 years, is lower than the rate mandated under the government’s own formula.
While the government determines the interest rate for small savings accounts, this rate is pegged to the yield on government securities on the market by a margin of zero to one hundred basis points. Therefore, according to the government’s calculation, whether market yields on government securities increase or decrease over the reference period, interest rates on modest savings plans should shift in the same direction.
One basis point is equal to 0.01% of the overall percentage.
The PPF’s formula-based rate of interest should be 7.51 percent, as stated in the Reserve Bank of India’s (RBI) current Monetary Policy Report, published on October 6.
In its June 2011 report, a committee led by Shyamala Gopinath, then a deputy governor at the Reserve Bank of India, recommended that interest rates on small savings be pegged to the going rate for government securities of similar tenure. In fiscal year 2016–17, the government began providing this information quarterly rather than annually.
It’s possible that the tax advantages of schemes like PPF were overlooked by the Shyamala Gopinath committee. “I think it (return) exceeds 10 percent if you add the tax benefit,” claimed a senior government official.
After leaving rates on small savings schemes unchanged for nine consecutive quarters during the COVID pandemic, when government bond yields fell sharply due to the RBI’s record liquidity injection, the government raised rates for five consecutive quarters beginning in October-December 2022. Over the course of the past five quarters, rates have been raised anywhere from 40 to 150 basis points.
Source: Reserve Bank of India
The Reserve Bank of India stated in its Monetary Policy Report on October 6 that “with these revisions, the actual interest rates on most SSIs (small savings instruments) are now better aligned with the formula-based rates.”
When compared to the prescribed formula, the PPF is the only small savings scheme now offering a lower-than-expected rate of interest. The interest rate on this program was 6.7% in October-December before a rate hike of 20 basis points by the finance minister on September 29.
The government loses money due to tax breaks, and the interest it pays on PPF funds is part of the cost. This individual also spoke on the condition of anonymity, but he explained that the government has decided to “kind of manage itself within the present rates,” which are among the highest they have seen.
Small savings interest rates appear to have continued to be administered despite being related to market rates. Most notably, the PPF rate was lowered by 70 basis points to 6.4% after the finance ministry announced a massive drop in modest savings interest rates for April-June 2021. Finance Minister Nirmala Sitharaman said the following day that the directive had been made “by oversight” and the decision was reversed.
