Is PPF Really Worth It? Now, You Get 40-Year Low Interest Rate

Popular tax-saving and retirement scheme Public Provident Fund (PPF) will be fetching a 7.9 per cent interest rate for the quarter starting April 1, 2017. This is the lowest interest rate offered on PPF deposits in around 40 years as the government has been progressively bringing down interest rate on small savings schemes, in line with the general decline in interest rate in the financial system. The government has lowered interest rates on small saving schemes like PPF, Kisan Vikas Patra and Sukanya Samriddhi by 10 basis points for the April-June quarter.

Should you still continue putting your money in PPF?

Yes, say some financial planners. Manoj Nagpal, CEO of Outlook Asia Capital, said, "PPF continues to offer positive real returns, considering that RBI is indicating an inflation of 4-5 per cent." In comparison, bank fixed deposits offer around seven per cent. Considering a post-tax interest rate of around 5-7 per cent, depending on one's tax slab, for people in higher tax slab clearly this will only help them match inflation, he added. "Bank fixed deposit will at best be a value protector." (Also read: Soon, repay home loan from PF)

Mr Nagpal said small-savings schemes like five-year NSC (National Savings Certificates), which offer superior alternatives for investors though with a slightly longer lock-in, could also be considered.

The interest rate on five-year National Savings Certificates has also been cut to 7.9 per cent. The interest income on NSC is taxed similar to that of bank deposits. Interest income is added to one's income and taxed according to the tax slab applicable for the person. On the other hand, PPF comes under the exempt-exempt-exempt (EEE) tax regime, meaning interest earned as well as the withdrawals from the PPF is tax-free.

For senior citizens, Mr Nagpal recommends the Senior Citizen Savings Scheme and the to-be-launched Varishtha Pension Bima Yojana from LIC. The Varishtha Pension Bima Yojana 2017 is a pension scheme for senior citizens, which was earlier approved by the Union Cabinet. The Varishtha Pension Bima scheme 2017, which will be implemented through Life Insurance Corporation of India (LIC), assures pension based on a guaranteed rate of return of eight per cent for 10 years.

It offers immediate annuity with a good mark-up on inflation, he added.

Among debt mutual funds, Mr Nagpal suggests accrual funds with a high quality of underlying portfolio for conservative investors. Given that the Reserve Bank of India has once again cautioned on the higher risks to inflation, conservative investors should reduce allocation to long duration debt funds, he added.

Accrual funds mainly focus on earning interest income from the coupon offered by underlying bonds while debts based on duration try to gain from the upward or downward movement of interest rate in the economy.