Ministry of Finance, Department of Economic Affairs (Budget Division)Government has vide its office memorandum No. No. 6-1/2011-NS.II (Pt.) Dated 11th November, 2011 announced increase in interest Rates on small saving schemes which includes interest rate on Public Provident Fund and other schemes. To address the issue of asset-liability mismatch in the National Small Savings Fund (NSSF), the central government has moved towards making returns from small savings instruments benchmarked against the government securities of similar maturities.
From this financial year, the rates for small saving instruments will be benchmarked to those of government securities (G-secs) of similar maturity periods with a positive mark-up of 25 basis points (bps). However, for Senior Citizen’s Savings Scheme (SCSS), the mark-up is 100 bps and for the new National Savings Certificate (NSC) with a tenor of 10 years, the mark-up is 50 bps.
So if a 10-year G-sec yields 8%, then the rate of interest for Public Provident Fund (PPF) would be 8.25%, 8% plus a mark up of 25 basis points. The government would notify the interest rates applicable for the year on various instruments before 1 April every year.
Being market linked, the rate of return would come down whenever there is a downward revision of interest rates, making it difficult for you to work towards a long term financial goal, like building retirement corpus, through instruments like PPF.
No fixed return on PPF
PPF forms an integral part of the long term planning, especially of the middle and the lower middle income groups. The return on PPF has been increased to 8.6 per cent for this year. However, going forward there would be no fixed return element attached to it.
Traditionally the future projections for PPF corpus, a product with 15 year maturity period, revolved around an approximate annual compounding return of 8 per cent. Most people use their provident fund for purposes such as children’s marriage, higher education, or buying a house. It will be difficult to project future income based on PPF returns. Annual adjustments depending on the prevalent PPF rate would have to be made to arrive at the right amount.
PPF rate of 8.6 per cent is non-taxable and a boon for investors looking to build their retirement corpus through debt allocation. 8.6 per cent non-taxable is equal to 12.30 per cent for investor in 30 per cent tax bracket or 10.75 per cent for investor with 20 per cent tax bracket.
Comparison of Interest Rate on Post Office Saving Schemes
| HOW THEY COMPARE | ||
| Maturity | Scheme | Returns (%) |
| 15 years | PPF | 8.60 |
| EPF | 9.50 | |
| 5 years | NSC | 8.40 |
| Bank fixed deposit |
9.25* |
|
| 5 years | Post Office MIS | 8.20 |
| Debt MIP | 7.27 | |
| – | Post Office savings account | 4.00 |
| Bank saving account | 6-Apr | |
| *State Bank of India’s fixed deposit | ||
After April 2012 Direct Tax will implemented the PPF a/c holder have to pay Tax on Maturity after 15 yrs or not.
In my considered opinion I would like to say Govt should immediately increase the crucial rate of interest on the deposit of PPF and the rate of interest should be 10% for a revised tenure of 25 years-and that woyld be the justice to the common people especially to the non-government people, who usually do not receive the benefits from Govt as like of Government employees.
This subject has been discussed extensively earlier in taxguru columns.
Mostly people are doing Private job and they do not get pension after retirement. They have only source of pension is PPF which can fulfil their requirement in their old age. In my opinion, Govt. should increase period of PPF i.e. 15 yrs – 20 or 25 yrs. and interest also. When his PPF will be matured after 20 or 25 yrs, he will get a huge amount and no need to go OLDAGE homes. In this regard, Govt. should aware the public to invest the money in PPF also.