Now, Earn up to 16.53% Returns from PPF

 

Hike in small savings rate makes 100% safe, tax-free investment more attractive

PRASHANT MAHESH MUMBAI

   For investors battered by high inflation and flat returns from stocks and mutual funds, the hike in interest rate on small saving schemes is a bonanza of sorts. The biggest gainers will be account holders of public provident fund (PPF), which now comes with the double benefit of higher interest rate (8.6%) and higher annual investment limit (. 1 lakh). Experts say the hike in interest rate has made the PPF the best option for conservative investors. If a couple starts contributing . 1 lakh every year, they can together build a tax-free corpus of . 61.8 lakh over 15 years. However, this assumes the rate will remain steady at 8.6%, a very unlikely scenario considering the rate is linked to the yield of government bonds. Analysts believe the interest rate cycle is close to peaking out and rates could go down in the coming months (see table). The raising of the annual limit from . 70,000 to . 1 lakh will benefit investors looking to park money in tax-free avenues. The . 2,580 interest earned on the additional investment of . 30,000 will escape the tax net every year. What's more, if the investor claims tax benefits under Section 80C, his effective return will be close to 16.53%. The revised rates for small savings are only for this fiscal and the new rates will be announced at the beginning of every financial year. If the PPF rate is 8.6% in the first year but subsequently drops to 7.6%, the corpus at the end of 15 years would be smaller by about Rs 97,500 than what it would earn under the 8% offered till now. "If you want to make the most of your PPF account, be disciplined and contribute every year and do not take loans from the account," says Sumeet Vaid, founder, Freedom Financial Planners.

NSC may not Find Favour Any More


"After the initial 15 years, one can keep extending the deposit for 5 years at a time," he adds. While the PPF has become more attractive, the new improved NSC with an interest rate of 8.4% but a reduced tenure of five years may not find favour with many investors.
Banks are offering up to 9-9.5% on 5-year tax savings fixed deposits. The State Bank of India offers 9.25% on such deposits.
Similarly, fixed deposit and savings bank accounts of the post office, despite the increased rates, are not attractive because banks offer better rates. Besides, it is easier to withdraw money from a bank, thanks to ATMs and their wider reach.
More details on changes in small savings schemes in Nov 21 issue of ET Wealth