If there is one instrument that ticks a lot of boxes and is, therefore, hugely popular, it is the Public Provident Fund (PPF). One of the key factors that is most often looked at when considering it as an investment avenue, is the PPF interest rate history to get an idea of the returns one can expect. Here is a look at the PPF interest rate history, in the context of the other key features of the PPF scheme, and its positives and negatives.
PPF interest rate history
The table below is a snapshot of the PPF interest rate history since April 2013, when it stood at 8.7%, to the present rate which is 7.1%.
To put the PPF interest rate history into context, let’s first take a look at the PPF scheme and its key features.
What is the PPF scheme?
The PPF scheme was launched in 1968 to mobilise small savings for the long term, primarily to fund retirement, especially among the population not covered by the EPFO. It is run by the National Savings Institute that works under the Department of Economic Affairs and is entrusted with the task of mobilising small savings under the National Savings Schemes of Government of India. These schemes are operated through post offices, nationalized banks and designated private banks and include the Post Office Savings account, Senior Citizen Savings Scheme and the Sukanya Samriddhi account among others.
The money collected under all the small savings schemes is put into the account of the ‘National Small Savings Fund’. The collections are invested in securities of the Central and State Governments and public agencies. Deposits, withdrawals and investments in Government securities is all done from this fund. Take a look at how the collections under the small savings schemes have progressed in the last 20 years here. Recently the PPF scheme of 2019 has replaced the old PPF scheme of 1968.
Key Features of the PPF scheme of 2019
- PPF accounts can only be held in an individual capacity by Indian citizens. Each person can only have one PPF account. You can, however, open one PPF account each (in addition to your own PPF account) on behalf of a minor child or person for whom you are a guardian.
- A PPF account can be opened with a minimum initial deposit of Rs. 500. Rs. 500 is also the minimum deposit that you have to make in a financial year, to keep your PPF account from going dormant. The maximum you can deposit in a financial year is Rs. 1,50,000 including any accounts that you may hold on behalf of a minor child. Any number of deposits can be made in a financial year in multiples of Rs.50. (This was earlier capped at 12 deposits a year under the old scheme).
- If minimum deposits are not made, the account is classified as ‘discontinued’. A discontinued PPF account can be revived by paying a penalty of Rs 50 and also making up all the missed deposits of a minimum of Rs.500 for each financial year.
- Money in the PPF account is locked-in for a period of 15 years. Any time after the expiry of 15 years, the account holder can apply to close the account and withdraw the proceeds. At maturity, the account holder can also choose between continuing the account with or without deposits. The account can be retained without making any deposits for any duration and the balance in the account will continue to earn interest. However, once one year without deposits has elapsed, the account holder cannot have the option to start making deposits again.
- If the account holder wants to continue with deposits, then the account has to be renewed in blocks of 5 years.
Why is the PPF Interest rate significant?
PPF interest rates are announced quarterly (quarterly interest rate announcements can be found here) by the Ministry of Finance - Department of Economic Affairs, along with the rates for all the other National Small Savings Schemes. Until 2016, the PPF interest rates, along with others, were announced on an annual basis. The current rate is 7.1% and has remained unchanged since April 2020.
Interest on small savings schemes compete with returns on other safe investment avenues such as bank FDs. To make sense for the investors as an effective tool to save for the long term, interest has to be able to offer a real return over inflation rates (CPI inflation rate was 4.91% in November 2021 and 4.48% in October 2021). This is one of the reasons it is important to know the PPF interest rate history and how rates compare with other fixed-income options.
Interest rates for small savings schemes are determined by the Government. By rule, they are linked to the prevailing yields of government bonds, and interest rates are declared every quarter for small savings schemes. For PPF, the PPF interest rate is usually 25 basis points higher than the yield on Government bonds of similar maturity.
However, in reality, the Government has often declared higher rates than what the rule would otherwise dictate. Factors ranging from the political, to the need to shore up savings for small investors have left small savings schemes and PPF interest rates higher in times of low interest rates.
For example, in March 2021, the Government announced a rate cut for all the small savings schemes for the April to June quarter. This would have brought PPF interest rate to below the 7% mark - but the Government very quickly reversed its decision, an indication of how it is much more than just economics that is at play in determining interest rates for the small savings schemes. PPF interest rates have also been retained at the 7.1%-level during the turbulent 2020-21 period when the pandemic hit.
Going back in time – a snapshot of the PPF interest rate history since inception
To go further back in time at the PPF interest rate history, take a look at the graph below that tracks the rate since the start of the PPF scheme in 1968.
With humble beginnings at 4.8%, the PPF interest rate history peaked at 12% between 1986 and 2000. It clocked a steady decline to the present rate. Therefore, it is important not to get too influenced by the peaks in the PPF interest rate history to make investment decisions now. With the overall interest rate scenario tracking lower – in line with economic development and growth – the high rates in the PPF interest rate history are also a thing of the past.
How is the interest on a PPF account balance computed?
Interest is computed at the end of each month on the lowest balance in the account from the close of the 5th day of the month to the last day of the month. However, it is credited to the account and compounded annually at the end of the financial year. This interest rate cycle has been at the root of many a debate on how best to time your investments into your PPF account in order to maximise interest earned, with many advocating for one-time annual investments to be timed to occur before 5th April.
The Positives - what makes the PPF scheme so attractive?
#1 Sovereign guarantee that means your money is safe
The PPF scheme, like the other products offered under the National Savings Schemes of Government of India, comes with a sovereign guarantee and hence, zero risk of default.
#2 Tax benefits are the icing on the cake
First, Section 80C of the Income Tax Act allows investments in PPF (among other eligible investments and expenditures) to be deducted up to a maximum of Rs. 1,50,000. Second, the interest earned on the PPF account is tax free. Third, proceeds on withdrawal are tax free as well. This makes PPF exempt at all levels – at the time of investment, at the time of interest accrued, at the time of redemption.
This makes its return profile superior to bank deposits or other small savings schemes or even debt mutual funds. To see how the new tax regime affects investments in PPF accounts, take a look at our article.
#3 Low minimum investment makes it accessible
A new PPF account can be opened with a minimum initial deposit of just Rs. 500. The minimum investment required to keep your PPF account alive is also just Rs. 500 each financial year. The PPF is therefore very accessible.
#4 Loan against part of the balance in PPF account at attractive rate
At any time after the expiry of 1 year from the end of the year in which the initial subscription was made but before expiry of 5 years from the end of the year in which the initial subscription was made, the account holder may apply for a loan.
This amount can be up to 25% of the balance to the credit of the account at the end of the second year immediately preceding the year in which the loan is applied for. The interest on such a loan is 1% pa (used to be 2% pa under the old scheme) – i.e., you’re charged an interest rate that is 1% above the prevailing PPF interest rate for the balance in the account.
The principal amount of the loan has to be repaid in 36 months either in installments or in a lump sum failing which, a higher rate of interest will be levied on the principal amount. Only one loan a year is allowed and the account holder cannot take another loan until principal and interest is repaid on the previous loan.
#5 Amount in PPF account cannot be attached
The amount standing to your credit in the PPF account cannot be attached for any other dues under any order or decree of a court of law and is therefore, virtually bullet proof.
The drawbacks
#1 Interest fluctuates
Since interest rates are announced quarterly, the interest you will earn is not predictable and rates may be much lower than you expected. The PPF interest rate history chart above shows you how much rates have changed over the years. Relying heavily on these rates could mean lower wealth creation. Current tax benefits for the PPF may also be modified, reducing its sheen.
#2 Limits on liquidity & flexibility
The 15-year maturity makes the scheme illiquid and inflexible. Stringent conditions on partial withdrawals and premature closures make it hard for you to access the amount if you need liquidity.
A partial withdrawal before maturity can be done any time after the expiry of 5 years from the end of the year in which account was opened, for an amount not exceeding 50% of the balance at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. This is allowed only once a year from an account that is not classified as ‘discontinued’. The account should not also have any outstanding loan against it.
Premature closure of the account is allowed in special circumstances only - such as requirement for treatment of a life-threatening disease of the account holder or family member, higher education of account holder or dependent children or a change in the residency status of the account holder. However, this too cannot be done before the expiry of 5 years from the end of the year in which the account was opened.
If you’re using the PPF as the debt portion of your asset-allocated portfolio, you will not be able to rebalance, shift into equity, or change allocations easily. Therefore, attractive benefits and rates in the PPF interest rate history need to be weighed against the absence of liquidity.
Suitability
The sovereign guarantee and tax benefits make a strong case for investing in the PPF. But limited liquidity and flexibility and a cap on the amount you can invest weigh down the PPF scheme.
With a horizon of 15 years, the PPF scheme also has to be evaluated against other equity-based investment avenues that offer the possibility of greater returns in a similar time frame. Going by only the previous high rates in the PPF interest rate history may also mean you wait for high returns that may never materialize as rates generally trend lower.
PPF is therefore a good avenue to invest part of your fixed income investment, earmarking it for retirement. It would also bring in a degree of capital protection to the portfolio. Used along with other debt-oriented and equity-oriented instruments, the PPF would help you build a balanced portfolio that maximises benefits of all available opportunities.
