Why Centre is keeping PPF interest rate lower than formula
Despite the fluctuating market interest rates, the Indian government has deliberately kept the Public Provident Fund (PPF) interest rate steady at 7.1% due to the tax advantages it provides, reported Moneycontrol, citing a senior government official. The PPF is a widely favored small savings tool since the interest earned is tax-free, and contributors can claim deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
Formula-based rate should be higher
The Reserve Bank of India's recent Monetary Policy Report indicates that the PPF's formula-based interest rate should be 7.51%. The government's formula states that small savings interest rates should be tied to market yields on government securities with a spread of 0-100 basis points above the yield of comparable maturity securities. For the uninitiated, one basis point is one-hundredth of a percentage point. The PPF interest rate has remained unchanged at 7.1% for over three-and-a-half years.
Tax benefit implications
In 2011, a committee headed by then RBI deputy governor Shyamala Gopinath, had said that interest rates on small savings should be linked to existing market rates on government securities. With respect to the report, the government official said, "What the Shyamala Gopinath committee possibly missed out was the tax benefit implications of certain schemes like PPF." "If you add the tax benefit, I think it (return) exceeds 10%," they added.
Interest rates now better aligned with formula-based rates
After maintaining interest rates on small savings schemes for nine consecutive quarters during the COVID pandemic, the government has increased them for five quarters in a row. The quantum of rate hikes starting from the October-December 2022 quarter has been 40-150 basis points. The RBI's latest Monetary Policy Report stated that with these revisions, "the actual interest rates on most SSIs (small savings instruments) are now better aligned with the formula-based rates."
