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Change in PPF rate and its impact on your savings

THE new rates for various small savings instruments have been revised from the start of the financial year 2013-14 and in this light, it is now necessary for individuals to go and review the overall situation. This is important from the point of view of making a decision about investments that they need to make in the current financial year. One such instrument is the public provident fund (PPF) and here too, the rate has been reduced slightly just like other instruments. Here is a close look at how this stacks up with respect to the other available options and how individuals should consider this in their investment portfolio.

Overall change:

PPF is a 15-year investment option that is suitable for long-term investing because of the length of time that it is in operation. After the initial completion of the 15-year period, the investment can be increased in blocks of five years without any restriction on the number of hikes. The rate of interest in 2012-13 on the instrument was 8.8 per cent, which has been reduced to 8.7 per cent with effect from April. The benefit of this instrument is that the returns are tax-free and are compounded, which builds up over a period of time. The other point is that the entire investment will witness the changed interest rate when they are applicable and not just the additional amount invested.

Position:

The first thing to understand with respect to the change in the interest rates is that the actual quantum of the change is marginal, and not very high. There is a reduction of just 0.1 per cent in the rate to 8.7 per cent, so in this sense, this is not very significant though it definitely makes an impact over a longer term on a compounded basis. Now the next part is to actually look at the other options that are available in the market and then see whether this is better than the rates available elsewhere. A look at the other options in the market shows that even the tax-free bonds, which can be called direct competitors because of the nature of the returns, did not offer more than 7.75 per cent return for small investors, which clearly puts the PPF ahead. The other aspect is that other options like bank fixed deposits or bonds might have a higher rate, but this is taxable so the net impact in terms of after tax rate when compared will actually turn out to be lower. It is important to compare similar rates for all these instruments so that the right decision can be made. Restrictions: There are also some restrictions that investors will face when they are investing in the PPF and this has to be known. There is a restriction on the total amount that can be invested in the PPF at Rs 1,00,000 per year. Even if an investor wants to invest more, he/she cannot do so because this is the limit that is present for the investment itself. There is a tax benefit that is available for investing in to the instrument, so this is an added benefit that the investor will be able to get.

They can complete their investment requirement as well as the tax requirements at one go, which will be helpful for them.

The long-term nature of the instrument should also ensure that they are able to plan for their retirement in an effective manner. Once these points are considered then the investment decision becomes far easier and this should guide the investors in their efforts.