The central government is likely to announce the interest rates of 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 for the July-September quarter 2024 by June 30, 2024.
PPF interest rate in the July-September quarter: How is the PPF interest rate calculated
How is the interest rate of PPF calculated? Interest rates of the small savings schemes — PPF, SCSS, SSY and others — are linked to market yields of the 10-year government securities in the secondary market. There are set formulae for mark-ups over the average yield of relevant G-Secs of comparable maturities during three months prior to each quarter.
The central government reviews the interest rates of small savings schemes every quarter based on the average G-Sec yield of the last three months. This is in line with the recommendations of the Shyamala Gopinath Committee, 2011 to ensure that the interest rates of small savings schemes are market-linked.
What will be the interest rate of PPF in the July-September quarter?
According to the formula notified by the Ministry of Finance in 2016, PPF has a spread of 25 bps over the benchmark yield. The benchmark 10-year bond yield has averaged 7.02% from March to May 2024, according to data from Investing.com. Going by the formula, the interest rate of PPF will be 25 basis points higher than the average 10-year G-Sec yield of the corresponding maturity. So going strictly by this process, the PPF rate should be pegged at 7.27% from July 2024.
Will the government increase the interest rate of PPF in the July-September quarter of 2024?
Even if there is room to slightly increase the PPF interest rate during the upcoming quarter, the government is expected to maintain a status quo, believe many experts. Abhishek Kumar, a SEBI-register investment adviser and Founder of SahajMoney.com says, “With inflation under control and yield on 10 Year G-Sec around 7% we do not see interest on PPF would go up during the revision cycle and expect that status quo on the interest rate would be maintained.”
Vishal Dhawan, a CFA and founder of PlanAhead.com says, “We do not see any changes in interest rate on the PPF account at this point, even though the government’s borrowing program will benefit from the RBI decision to pay out a higher dividend a few weeks ago.”
Historically the government has not consistently followed the formula recommended by the Shyamala Gopinath Committee to decide the interest rate of PPF or other small savings schemes. There have been instances where the Gopinath Committee’s prescribed formula indicated a lower interest rate, yet the government opted to offer a higher rate on PPF. Therefore, the PPF interest rate may not necessarily increase in the July-September quarter of 2024 solely based on the formula suggesting an uptick.
Reasons why the PPF interest rate has not been increased for four years
The Exempt-Exempt-Exempt or EEE status of PPF could also be why the interest rate has remained unchanged for four years now. PPF is one of the few small savings schemes that enjoy EEE status — the amount you invest qualifies for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. The interest you earn from a PPF account is also tax-free. Further, there is no tax on the maturity proceeds from the PPF account. So, if you consider the tax-free yield, PPF offers one of the best returns among small savings schemes. Despite enjoying EEE status, according to some experts, the central government has raised the interest rate on Sukanya Samriddhi Yojana to 8%. However, the corpus of PPF could be substantially higher when compared to SSY with restricted eligibility conditions or other small savings schemes. Dev Ashish, a SEBI-registered investment adviser and Founder of StableInvestor.com, highlighted in his blog that the higher Assets Under Management (AUM) of PPF might result in a significant cost impact on the government due to the tax-free interest burden. It could be another potential reason why the government is reluctant to raise interest rates on PPF.
Will interest rates of SCSS, NSC and Sukanya Samriddhi go up in the July-September quarter?
Just like PPF, Sukanya Samriddhi Yojana has a spread of 75 basis points and the Senior Citizens Savings Scheme has the biggest spread of 100 basis points. Will the government tweak the interest rates of other small savings schemes such as PPF, SCSS, NSC and SSY? Answering this, Dhwan says, “Small savings rates are also unlikely to see any material change in our view, as the Union Budget presented in the second half of July will probably give better clarity on how the government plans to manage the trade-off between growth-oriented policies and fiscal control, and thus we believe that changes on small savings rates if any are likely to happen in the quarter post the Union Budget.”