The government has to review the interest rates of all small savings schemes for the July-September quarter. PPF interest rates were last increased in 2020.
PPF SCSS SSY Interest rate hike: The new interest rates for all small savings schemes including Kanya Samridhi Yojana are to be announced by 30th June. In such a situation, the question arising in the minds of many retail investors is whether the government will increase the interest rates on Public Provident Fund (PPF) along with other schemes this time? This is because the government has not increased the interest on PPF for the last 4 years.
Opportunity to review interest rates
The small savings schemes for which the government has to announce new interest rates for the next quarter by June 30, 2024, include Public Provident Fund (PPF), Senior Citizen Savings Schemes (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), Post Office Monthly Income Scheme (POMIS) and other small savings schemes. Among these, PPF investors have been eagerly waiting for the increase in interest rates for the longest time.
The interest on PPF was last increased in 2020
The last increase in the PPF interest rate was done for the April-June quarter of 2020. Since then, that is, for the last 4 years, it has been getting only 7.1% interest annually. Whereas during the same period, the central government has increased the interest rates of most other small savings schemes from 40 basis points (BPS) to 150 bps.
At present, among the major small savings schemes, the interest rate of PPF is much lower than many other schemes. In comparison, 8.2 percent interest is being given on SSY, 8.2 percent on SCSS and 7.7 percent on NCS. Even 7.5 percent interest is being given on time deposits of post office for 5 years. This is the reason why the question is arising in the minds of the people that will the government do justice to those who invest in PPF this time?
Formula for determining the interest rate of PPF
There is a formula for determining the interest rates of small savings schemes. Under this formula, the interest rates of all small savings schemes including PPF, SCSS, SSY are linked to the secondary market yield of 10-year government securities (10-year G-Secs). The calculation of the interest rate of a scheme every quarter is based on the average market yield of G-Secs with the same maturity period during the previous quarter.
A mark-up i.e. margin above this yield is fixed for every scheme. The central government reviews the interest rates on this basis after every quarter. This work has been done on the basis of the recommendations made by the Shyamala Gopinath Committee of RBI in 2011 to link the interest rates of small budget schemes to the market. The interest rate of PPF should also be fixed in this manner.
What should be the interest rate of PPF?
According to the formula notified by the Finance Ministry in 2016, the interest rate of PPF should be 25 bps higher than the benchmark G-Sec bond yield. During March to May 2024, the benchmark 10-year bond yield has averaged 7.02%. In such a situation, according to the formula, the interest rate of PPF should be 25 basis points above this. That is, if the government accepts this formula, then from July 2024, the interest rate of PPF should be fixed around 7.27%.
Will the government increase interest on PPF?
It is not necessary for the government to follow the formula suggested by the Shyamala Gopinath Committee to fix the interest rates of PPF or other small savings schemes. Historically, the government has taken decisions different from this formula many times before. The same has happened in the case of PPF interest rates in the last 4 years.
Therefore, it is not necessary to increase the interest rates of PPF for the July-September quarter on the basis of this formula. Experts believe that investment in PPF gets triple E (E-E-E) benefit in the income tax rules. Therefore, the government does not show much interest in increasing its interest rates. However, interest rates have been increased in Sukanya Samriddhi Yojana despite getting the same benefit.
