Interest rates on public provident fund and other small savings schemes were cut recently. For the October to December quarter, the rate has been fixed at 8 per cent, down from 8.1 per cent. In total, interest rate on PPF has been cut by 70 basis points from the beginning of this fiscal year, beginning April 1, 2016. PPF is one of the most popular investment options for retirement and tax savings.
Interest rate on PPF is also set to fall further. Currently, PPF rates are revised every quarter and linked to yields on government bonds. Analysts expect yields on government bonds to drop further on expectations of further rate reduction by the RBI and inflation further declining on the back of good monsoon.
New RBI Governor Urjit Patel earlier this week made a 25-basis-point cut in repo rate in his first monetary policy.
“Our estimate is that the next phase of RBI rate cuts will have bigger impact on the market-linked rates (10-year government bond yields) and we expect that in the next 12-15 months, market-linked rates will move down further by at least another 100-125 bps from here,” said Manoj Nagpal, CEO of Outlook Asia Capital.
Despite the fall in PPF rates, some financial planners say that it still remains a good investment option for accumulating money for the long term.
“8 per cent in PPF is still good as it is tax-free and comes under the EEE or exempt, exempt, exempt regime. It is vastly better as compared to bank fixed deposits or some other debt instruments where post-tax returns would be much lower than 8 per cent,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.
EEE refers to the fact that the original investment qualifies for tax deduction while the interest income and maturity proceeds are also tax-free.
Mr Sadagopan also suggests that at the current juncture, debt mutual funds are also a good option “if one has a horizon of three years or more as then it is subject to benefits of long-term capital gains taxation”.
Mr Nagpal of Outlook Asia Capital also says that PPF still remains an attractive option despite the rate cut. “PPF continues to offer 8 per cent tax-free interest rates which in the current scenario are attractive. In terms of real interest rates, this translates into almost a 3 per cent real interest above the RBI’s inflation target of 5 per cent for March 2017. This offers a significant spread to not only inflation but also other comparable guaranteed interest instruments.”
Despite the rate cuts, the Senior Citizen Savings Scheme, another small savings scheme, also still offers a good alternative to retired investors, Mr Nagpal said.
Investors looking for a higher coupon (interest rate) could also evaluate perpetual bonds of banks though they may not offer liquidity, he added.
Perpetual bonds, which are typically issued by banks, have no defined maturity date. They continue to pay the interest amount to the bondholder forever. Some investors are attracted towards perpetual bonds as they offer steady, predictable source of income over a long period of time. Perpetual bonds are not tax efficient as PPF and though the bonds are traded on exchanges, liquidity could be an issue.
