PPF: From 12% to 7.1% – Why this once sought-after tax-saving scheme no longer attracts middle-class investors

What would you say about an investment instrument that used to give 12 per cent interest a year and now offers only 7.1 per cent? Well, it doesn’t remain as a sought-after investment instrument as it did earlier. This is exactly what happened with public provident fund, or PPF as it is known among the masses.

With the change of era, bank interest rates and FD (fixed deposit) rates have slipped substantially in the past two decades, and so did the interest on PPF.

For the uninitiated, PPF is a small savings scheme that offers assured returns to investors. One can invest anywhere between ₹500 to ₹1.5 lakh in a financial year. Deposits can be made in lumpsum or in installments.

If a minimum deposit of Rs.500 is not made in any financial year, the PPF account will be discontinued.

There are several reasons why this scheme struck a chord with the middle-class investors in the past. First, it is run by the Government of India, which lends credibility to the scheme. Additionally, it has a 15-year lock-in period, which instils a sense of investing discipline among small investors who traditionally are reluctant to invest in equity and other risk-laden investments.

However, partial withdrawals are permitted from the fifth year onwards.

Not to mention that investment in PPF is exempt from income tax under section 80C of income tax so long as taxpayers have opted for the old tax regime.

A massive fall

Before the turn of the century, PPF offered a whopping 12 per cent interest on investment.

With the dawn of the 21st Century, however, interest rates started sliding downward. In the first quarter of this century, they were cut down by 1 per cent.

Next year i.e., in 2001, PPF started offering its investors 9.5 percent. It later became 9 per cent in 2002 and 8 per cent in 2003.

For the next 8 years, the interest rate remained the same at 8 per cent.

Interestingly, it started to rise in the last quarter of FY2012, when it spiked to 8.6 per cent. Further, it inched to 8.8 per cent in April 2012. But the rise was short-lived, and it started falling again.

(Source: nsiindia.gov.in)

In April 2013, the interest rate declined to 8.7 per cent, which continued for the next three years. Following this, it declined further to 8.1 per cent in April 2016. This downward journey continued until September 2018, when the rates were cut down to 7.6 per cent.

Although they rose marginally again to 8 per cent in Oct 2018, they only fell further, first to 7.9 per cent and finally to 7.1 per cent, which stands to date.

New tax regime

As the new tax regime became a default regime on April 1, 2023, investing in PPF is not tax-exempt any more, which is another reason for this once sought-after scheme to fall out of small investors’ favour.

However, taxpayers still have the option to opt out of new tax regime in order to continue claiming the income tax exemptions.