Small Savings Schemes Including PPF and KVP Set To Yield Lesser As Interest Rates Come Down

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Small Savings Schemes

In a glancing blow to the common man of the country, especially the elderly and the retired who survive on interest garnered on bank deposits and small savings schemes, the Public Provident Fund, the Kisan Vikas Patra, the Sukanya Samriddhi Account and the Senior Citizens Savings Scheme are set to earn less as the government is mulling an interest rate cut. Following the Shyamala Gopinath Panel formula, the PPF rate could be cut by almost 100 basis points to seven percent starting from the January to March 2017 quarter.

The Gonipath panel formula as explained in this report mandates that the interest rates of small savings schemes are slightly higher than the average yield of government bonds of the same maturity in the preceding three months. The 10-year bond yield has dropped to 6.5% and has stayed below the 7% mark throughout the past three months, leading experts to conclude that the PPF rate could fall to almost 7% in the first three months of the next year.

Small Savings Schemes

The PPF is one of the most preferred tax-saving and retirement funding options available today.Earlier this week, the Employees Provident Fund Organisation (EPFO) decided to lower the interest on provident fund deposits for the current fiscal to 8.65 percent, down 15 basis points from 8.8 provided in 2015-16. The EPFO has a four-crore subscriber base.The RBI has cut rates by 175 basis points since 2015 due in major part to falling inflation. However, a three-figure basis point cut is unprecedented. Prospects for further monetary easing from the central bank in the wake of demonetisation are likely to put further downward pressure on bond yields, which would see interest rate cuts on all of the schemes mentioned above. Other sources state that since the government has not passed on the full extent of fall in bond yields to small savings instruments, a rate cut while being unavoidable, will be lesser and the 100 basis-point cut may be gradually distributed.

The retired people of the country have already faced lowered interest from banks in line with falling interest rates. Should the PPF interest rates go down further, they will face extreme inconvenience. PPF investments remain the most popular investment avenue for accumulating interest in India. They are tax-exempt, meaning that they offer tax advantage at the time of investment, interest accumulation and at the withdrawal and redemption stage. The government has asked for more investments in the pension schemes to alleviate the difficulties lesser returns bring with them.

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