Public Provident Fund (PPF): Why Govt Didn't Hike PPF Interest Rates In Q2FY24?

The finance ministry hiked the interest rates for small savings schemes on June 30th by up to 30 bps for Q2 or the quarter of July-September 2023. The interest rates for 5-year recurring deposits (RDs) have gone up by 30 bps to 6.50%, while those for 1- to 2-year time deposits have raised by 10 bps. Apart from these two schemes, interest rates for all other schemes like PPF, SCSS, Kisan Vikas Patra have been kept unchanged. The Public Provident Fund (PPF), one of the most well-known post office schemes, is well-known for its longer 15-year tenure and EEE tax benefits, but the bad news for investors is that the PPF interest rate was left steady in Q2 FY24 and is now 7.1%, the same as it has been since April 2020. The government normally adjusts the interest rates on small savings schemes on a quarterly basis.

Why Govt Didn't Hike PPF Interest Rates In Q2FY24?

Pamarty Venkataramana accomplished international corporate lawyer, columnist & advisor to income tax officials and ministries said "Over the past two quarters, the Government has raised interest rates for other savings schemes such as the Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY) account, Kisan Vikas Patra (KVP), and various Post Office deposit schemes like Post Office Time Deposit, Post Office Monthly Income Scheme (POMIS), and Post Office Recurring Deposit (RD). Given that the Reserve Bank of India (RBI) has increased the repo rate by 2.5% since May 2022, there is hope among depositors for a further increase in the PPF interest rate.

To predict whether the PPF interest rate will indeed increase, it is essential to understand the mechanism used to determine the interest rates of various small savings schemes."

"The interest rates of post office small savings schemes, including PPF, are tied to the yields of 10-year Government Securities (G-Secs). The Finance Ministry reviews the interest rates of these small savings schemes, including PPF, every quarter of a financial year. Between March and June 2023, the average yield of 10-year G-Secs was around 7.3%. According to the Government's formula for calculating small savings interest rates, the PPF rate should be 25 basis points higher than the average 10-year G-Sec yield of the corresponding maturity. If the formula is strictly followed, the PPF interest rate should be increased to 7.55%," he said.

"However, the G-Secs yield has experienced a gradual decline, making it unlikely for a significant hike in PPF interest rates. During the January-March quarter, 10-year G-Secs yield ranged between 7.3% to 7.5%, but it gradually declined to 7% - 7.1% in the April-June quarter. Moreover, the interest rates of most small savings schemes are already comparable to the long-term fixed deposit rates offered by banks. Given the RBI's pause in repo rate hikes and decreasing inflation, experts believe that there might not be much scope for an upward revision of the PPF interest rate. The PPF interest rate is calculated on an annual basis and compounded yearly. The rate of interest is expressed as a percentage per annum. The calculation is based on the minimum balance in the PPF account between the 5th and the end of the month, and the interest is credited to the account on March 31st each year," said Pamarty Venkataramana.

Armaan Joshi, Financial Expert and Lead Editor, Forbes Advisor said "With the Central Government increasing the interest rates for small savings schemes including the Senior Citizen Savings Scheme, National Savings Certificate, Kisan Vikas Patra, Sukanya Samriddhi Yojana along with post office savings accounts, there has been anticipation that the interest rates for public provident fund will finally be revised breaking the 3-year hiatus in which the rates have remained unchanged at 7.10%."

"This, however, may not be possible for PPF interest rates given two key factors: one, the revision for various small savings schemes was factored to bring them at par with the interest rates on fixed deposits, which isn't needed in the case of PPFs. Second, the quarter-on-quarter analysis of the 10-year yield on government securities in the secondary market showed fluctuations on the downward side from Q4 of FY23 to Q1 of FY24 leaving no scope for hike in PPFs' interest rate, which generally average 25 bps more than the benchmark 10-year G-secs yield," said Armaan Joshi.

"The PPF interest rate calculation is simple: The lowest balance in your PPF account between the fifth day of the month to the last day of the month every month is considered and interest amount is credited to your registered account at the end of the financial year, i.e. on March 31," said Armaan Joshi.

Pranit Arora, Co-Founder and CEO of Univest said "I believe that the government's decision not to hike PPF interest rates for Q2 is a reflection of the complex economic landscape we are currently navigating. While it may be disappointing for investors seeking higher returns, it's important to understand the rationale behind such decisions. The government's priority lies in maintaining a delicate balance between stimulating economic growth and managing inflationary pressures. As responsible citizens and investors, it is crucial for us to appreciate the larger context and remain adaptable in our financial strategies. At Univest, we are committed to empowering individuals to make informed investment decisions, regardless of the interest rate environment."

Mr. Harish Menon, Co-founder and head of Investments and product research at House of Alpha said "PPF interest rate is decided by the government based on the 10 year government security yield. The yields have remained stable on point-to-point bases over the last quarter signifying constant interest rates for PPF."

How Public Provident Fund (PPF) Interest Rate Is Calculated?

According to Pamarty Venkataramana, The interest rate on the Public Provident Fund (PPF) is calculated based on the rates set by the government. The interest rate for PPF is declared by the government on a quarterly basis and remains fixed for that specific quarter. The interest is calculated on an annual basis but credited to the account at the end of each financial year.

Here's how the PPF interest rate is calculated:

Quarterly Interest Rate: The government announces the interest rate for each quarter, expressed as an annual percentage. For example, if the interest rate for a particular quarter is 7.1%, it will be divided by 4 to determine the quarterly interest rate.
Monthly Compounding: Although the interest is calculated on an annual basis, it is credited to the account at the end of each financial year. However, for the purpose of calculating the interest, monthly compounding is considered. This means that the interest for each month is calculated based on the monthly interest rate.

Balance Calculation: The interest is calculated on the minimum balance between the 5th and the end of the month. If you make any deposits or withdrawals during the month, it will not impact the interest calculation for that month.

Example Calculation: Let's assume the interest rate for a particular quarter is 7.1% per annum. The monthly interest rate would be 7.1% divided by 12. Now, consider you have an average balance of Rs. 2,00,000 in your PPF account during a particular month. The interest calculation for that month would be:

Monthly interest rate: 7.1% / 12 = 0.5917% (rounded to four decimal places)

Interest earned: Average balance * (Monthly interest rate/100) = 2,00,000 * (0.5917/100) = Rs. 1,183.40

Please note that this calculation does not take into account the compounding effect that happens annually. The interest earned each month is credited to the account at the end of the financial year, and the compounding effect happens on an annual basis.
It's important to keep in mind that the above calculation is a simplified example, and the actual calculation may vary based on the specific rules and regulations of the PPF scheme and the interest rates declared by the government.

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