Investors who have placed their savings in the Public Provident Fund (PPF) are eagerly anticipating updates regarding potential changes in PPF interest rates. The Finance Ministry is scheduled to conduct its quarterly assessment of interest rates for small savings schemes, including the PPF, by the end of this month, September 2023.
PPF rates unchanged since 2020
The anticipation among PPF account holders is palpable, with many hoping for a boost in interest rates. As of now, the PPF interest rate stands at 7.1 per cent per annum. Nonetheless, since the PPF interest rate has remained unaltered since April 2020, investors are left with a sense of curiosity regarding the forthcoming review meeting.
However, it's worth noting that the Finance Ministry has been regularly revising interest rates for small savings schemes on a quarterly basis since 2016. Consequently, there is the possibility of a change in the PPF interest rate at the close of this month.
Several reasons underpin the desire for an interest rate increase among PPF account holders. First and foremost, inflation has exhibited a consistent upward trajectory in recent months. Consequently, the purchasing power of money has dwindled. A higher PPF interest rate would serve as a countermeasure against the erosive effects of inflation, safeguarding the value of investors' savings.
Secondly, interest rates provided by other financial institutions like banks and mutual funds have been on the rise. Consequently, PPF account holders are presently earning a comparatively lower return on their investments than they could potentially obtain elsewhere. An elevated PPF interest rate would render PPF more competitive in comparison to alternative investment avenues.
Can a PPF account help you achieve millionaire status?
The power of compounding can work wonders only if you are willing to have time on your side. This means that the quarterly compounding effect can help achieve a sizeable corpus provided you invest regularly through systematic investment plans (SIPs) every year for 15 long years.
Assuming that you deposit ₹1,50,000 every year for 15 years in a PPF account. Yearly investments of ₹1,50,000 at 7.1 per cent interest for 15 years will help you amass ₹40,68,209 which is exempt from tax.
Extending your PPF account is open to everyone and can be repeated indefinitely. To initiate this extension, you should complete a Form H, which can be submitted at your bank or post office branch before the conclusion of the financial year in which your account reaches maturity.
Upon extending your PPF account, you have the flexibility to decide whether to continue making new investments or not. Opting to maintain your investments allows you to accrue interest not only on your existing PPF maturity amount but also on your newly injected funds. This presents an excellent opportunity to enhance your returns over the extended duration.
Assume that you choose not to redeem your PPF investment on its maturity but choose to extend it for five more years. Continuing to invest in the PPF account for five added years will yield you ₹66,58,288.
Assume that a 30-year-old investor starts putting money in a PPF account and continues his or her investment journey for the next 30 years through continued extensions. The maturity amount at the end of 30 years would be ₹1,54,50,911, which is fairly a substantial amount.
Many investors look for innovative ways to meet their financial goals and achieve a corpus extending to crores of rupees. A simple investment in a PPF account for 30 long years can help achieve a part of one’s financial goals easily, sans the effect of market volatility.
PPF continues to be appealing to risk-averse investors
PPF distinguishes itself from other small savings schemes such as SCSS and NSC because of its tax-free income status upon withdrawal. This implies that, despite the possibility of lower returns in comparison to other schemes, the post-tax income from a PPF account can ultimately be more advantageous.
The after-tax earnings from a PPF account can surpass those from a taxable investment scheme, even if the PPF account yields a lower interest rate. This stands as a primary factor contributing to the widespread popularity of PPF among taxpayers. It provides several tax advantages, including:
- Deductions for contributions of up to ₹1.5 lakh under Section 80C of the Income Tax Act.
- Interest earned on contributions that are exempt from taxation.
- A maturity amount that is also tax-free.
PPF rate considerations
Several factors will come under the Finance Ministry's scrutiny when evaluating the PPF interest rate. These factors encompass:
- The prevailing inflation rate.
- The yield on government bonds.
- Interest rates offered by other financial institutions.
However, there are also considerations that might restrain the government from increasing the PPF interest rate. Firstly, the government has been committed to maintaining low interest rates to stimulate economic growth. An elevated PPF interest rate would elevate borrowing costs for businesses and consumers, potentially impeding economic expansion. The government has been striving to curtail its fiscal deficit. An augmented PPF interest rate would escalate the government's interest payments and exacerbate the fiscal deficit.
The direction in which the PPF interest rate may move at the end of this month is uncertain. In summation, predicting whether the PPF interest rate will rise at the conclusion of this month remains a challenge. What matters is if you invest in this scheme and choose to stay invested throughout the 15-year-long investment tenure.