New Delhi : In a decision that evoked immediate uproar by the salaried and self-employed class, the government on Friday slashed the interest rates on public provident fund (PPF) from 8.7 percent to 8.1 percent, soon after retracting the unpopular proposal to partially tax withdrawals.
In the process, the interest rate for the national savings scheme was also reduced sharply from 8.5 percent to 8.1 percent, for Kisan Vikas Patra (KVP) from 8.7 percent to 7.8 percent and for five-year recurring deposit to 7.4 percent from 8.4 percent.
Even the girl child scheme Sukanya Samridhhi Account (SSA) was not spared. The cut: From 9.2 percent to 8.6 percent.
"The new rates will be effective from next fiscal (April 1, 2016). The interest will be calculated on quarterly basis," A.K. Chauhan, joint director in National Savings Institute (NSI), told IANS.
According to him, the main reason for the downward revision was the two year yield on government securities (G-Sec) had gone down.
The interest rates for various small savings schemes were recalculated with reference to the G-Sec yields of equivalent maturity for the period December 2015-February 2016, and based on it, rates on various schemes for 2016-17's first quarter have been notified.
According to the government, the quarterly revision of interest rates will ensure that the interest rates under small savings schemes are more dynamically related to current market rates, thereby enabling the banks to move their interest rates in line with current money market rates.
Chauhan said the total corpus of all small savings scheme was around Rs.300,000 crore. The net accretion this year was around Rs.65,000 crore till January 31.
The SSA has around 85 lakh accounts with a deposit of around Rs.3,500 crore, while the KVP corpus is over Rs.21,000 crore, Chauhan said.
Earlier, the government had proposed a tax on 60 percent of the PPF corpus on maturity if it was not invested in annuities - that is schemes that fetch periodic returns.
Also proposed was a limit on monetary contributions of employers in provident fund to Rs.150,000 per annum for tax sops.
Both these were withdrawn.
The government also cut interest rates on other small savings term deposit schemes.
The small savings interest rates are perceived to limit the banking sector's ability to lower deposit rates in response to the Reserve Bank of India's monetary policy, the government said last month.
Interestingly the rate of interest on the Employees Provident Fund (EPF) is 8.8 percent.
"The self-employed are hit by this move. For them the PPF is the one safe mode of investment. Now the return has come down," N.Varadarajan, a self-employed person, told IANS.
Meanwhile the decision led to a big public outcry on microblogging site Twitter.
"Bleed the ones who pay tax! This #ppf rate cut by #Modi government is so not on, Anti national!," tweeted Vijaita Singh.
Sharing similar sentiments, another net-savvy citizen Sudhanshu S. Singh tweeted: "What's this? Interest rate on PPF has been cut to 8.1%. Where should common people invest for safe earning."
Sagar Kumar Jain took a potshot at Prime Minister Narendra Modi's government, tweeting: "Modiji has to offer something to common man, everyday!! PPF interest rate cut drastically. Difficult to see Lotus in assembly post 2019."
Some of the postings were especially directed against Finance Minister Arun Jaitley.
"EPF tax or PPF interest: Why is Arun Jaitley anti-common man? Being a billionaire he can't understand poverty?," went an equally angry tweet from Bharatha10.
The opposition also opposed the government's decision.
"Government's decision to cut PF interest rates is unfortunate.Why are they taking away one of the last avenues of savings in a depressed economy?" Congress leader Ahmed Patel tweeted.
Party spokesperson Randeep Singh Surjewala, in a statement, said: "It is a criminal breach of trust with hapless people who put their money in the custody of the government of India with the belief that they will not be cheated."
Communist Party of India-Marxist (CPI-M) general secretary Sitaram Yechury also hit out, tweeting: "Small savers are the backbone of our savings. With no social security net, they rely on such guaranteed returns."
Economist Ashwaini Mahajan, also the co-convenor of Swadesh Jagran Manch, also criticised the move, saying it will "leave an adverse impact on the domestic saving".
"As a student of economics, I feel the authorities must reconsider about the decision. I do not think there was enough and good ground at the moment to slash the interest rate on the PPF," Mahajan told IANS.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
Beyond tax savings, investors under these schemes look at their stable nature in regard to security of investments and regular assured returns. Considering their role in providing financial security for elders and acting as a source of liquidity when earnings fluctuate in the present uncertain employment market, there is a strong case for ensuring a rate of return on such investments, higher than that available on bank deposits. The recent SBI research report suggestion to consider differential (higher) rates for savings in the accounts of elders and in age-groups above 45 years is worth looking at. Another group which may deserve differential treatment may be those who are not investing in these instruments for income tax benefit.
A related issue is professionalism in management of funds flowing into governments’ kitty which now come from captive sources like LIC, EPFO, banks(SLR deposits), National Savings Schemes and PPF. As these funds are used by government and no investment risk prevalent in money with the banking system is to be factored in, it is natural that savers expect a higher rate of return on investment in such financial instruments. Any thought of relating interest rates on investments in such instruments with bank interests is unacceptable.
M G Warrier, Mumbai
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