The interest rates offered by the Union government on two of India’s most popular small savings schemes — the Public Provident Fund and five-year recurring deposits — continue to languish below the rates they should have earned as per a formula-based system adopted since April 2016, the Reserve Bank of India (RBI) has indicated.

The PPF rate has been static at 7.1% since April 2020. The return on the five-year recurring deposit (RD), which had been frozen at 5.8% from April 2020 to March 2023, had been hiked gradually over the first three quarters of 2023-24, taking it to 6.7% by last October.

At the time, the RBI had reckoned that the returns on the PPF were 41 basis points (bps) lower than their formula-based rates, while the five-year RD rate was 21 bps lower, for the October to December 2023 quarter. One basis point equals 0.01%.

RBI formula

The formula for quarterly resets of small savings rates, mooted by a panel led by former RBI Deputy Governor Shyamala Gopinath, links them to secondary market yields on government securities of comparable maturities over a three-month period prior to each quarter.

The PPF rate was last hiked in October 2018, when it was pegged at 8% ahead of the 2019 Lok Sabha election. After that poll, the government had reduced the rate to 7.9% from July 2019, and slashed it further to 7.1% at the onset of 2020-21, when it cut rates on all small savings instruments in the range of 0.5 and 1.4 percentage points (or 50 to 140 bps).

Prior to the 2024 Lok Sabha election, the Union government announced a hike in rates on most small savings schemes for six successive quarters, culminating in the January to March 2024 quarter, when the returns on the Sukanya Samriddhi Account Scheme (SSAS) were raised from 8% to 8.2%, and the three-year time deposit from 7% to 7.1%. While there have been no changes effected in rates since, the PPF rate has been excluded from the ambit of all these hikes.

Tax-free scheme

“The Government of India kept rates on small savings schemes unchanged for Q2:2024-25 [July to September 2024]. Rates on various schemes are now aligned with the formula-based rates except for public provident funds and five-year recurring deposits,” the RBI noted, in its latest monetary policy report released as part of its monthly bulletin last week. Unlike last October, the RBI has not quantified the gap between the formula-based rate and the PPF and five-year RD rates.

The Finance Ministry has generally defended the stasis in PPF rates by emphasising that the returns on the scheme are tax-free so tax-adjusted returns are higher. But the same tax treatment is also offered on the SSAS, which was launched in 2015. The SSAS rate was frozen at 7.6% from April 2020 to March 2023, but was raised to 8% last April and 8.2% from this January.