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The Lok Sabha elections are over and the NDA has formed the government. MPs and ministers have taken oath. So now the common people or the middle class are waiting for a big relief. That relief is the increase in the interest rates of small savings scheme. After the formation of the new government, now the government faces a big challenge of changing the interest rates of small savings schemes between the July to September quarter. Investors of the most popular scheme among small savings schemes, Public Provident Fund, are waiting for an increase in interest rates. The last change in PPF interest rates was made for the April-June 2020 quarter. Four years have passed since then and the PPF interest rate remains unchanged at 7.1 percent.
During this period, the central government increased the interest rate of small savings schemes from 0.40 per cent to 1.50 per cent. Now the big question is whether the government will finally make PPF investors happy this time? The central government has announced the opening of Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), Post Office Monthly Savings Scheme (POMIS) and other savings schemes. The interest rates for the July to December quarter can be announced by June 30, 2024. So let's understand how much the government can increase the interest rates of these schemes for the next quarter.
How is PPF interest rate calculated?
Interest rates on small savings schemes – PPF, SCSS, SSY and other schemes are linked to the market yield of 10-year government securities in the secondary market. The central government reviews the interest rates of small savings schemes every quarter based on the average government security yield of the previous three months. This is based on the recommendations of the Shyamala Gopinath Committee, 2011. So that it can be ensured that the interest rates of small savings schemes are linked to the market.
What should be the interest rate of PPF?
According to the formula proposed by the Ministry of Finance in 2016, PPF has a margin of 0.25 percentage points over the benchmark yield. According to data from Investing.com, the yield on benchmark 10-year bonds averaged 7.02 per cent from March to May 2024. According to the formula, the average maturity relative to the PPF interest rate will be 0.25 basis points higher than the 10-year G-sec yield. Therefore, strictly following this procedure, the PPF rate should be fixed at 7.27 per cent from July 2024.
Will the government increase the interest rate of PPF?
Many experts believe that the government may maintain the status quo, even though there is scope for a marginal hike in PPF interest rate during the next quarter. Abhishek Kumar, a SEBI registered investment advisor and founder of Sahajmani.com, said in a media report that inflation is under control and the yield on 10-year G-Sec is around 7 percent, we do not think interest on PPF will increase. Interest on PPF will increase during the revision cycle and it is expected that the status quo on interest rates will be maintained.
Why has the interest rate on PPF not increased in the last four years?
It appears that due to the exempted or EEE status of PPF, its interest rates have remained unchanged for the last 4 years. PPF is one of the few small savings schemes that has the provision of various exemptions. Investment in PPF allows investors to avail tax exemption up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. PPF account earns investors interest which is tax free.
Apart from this, there is no tax on the maturity of PPF account. In such a situation, if we look at the tax free yield, PPF gives good returns among small savings schemes. According to some experts, despite the exemption status, the central government has increased the interest rate on Sukanya Samriddhi Yojana to 8 percent. Whereas the AUM of PPA is bigger than SSY.
Will the interest rates of SCSS, NSC and Sukanya Samriddhi increase?
Will the government change the interest rates of other small savings schemes like PPF, SCSS, NSC and SSY? Reacting to this, experts say that there is little chance of any change in the interest rates of small savings schemes. It will be clear in the budget coming in the month of July when the interest rate of small savings scheme can be increased. After the budget, there may be some possibility of increase in interest rates in the third quarter of the financial year.
