Why are PPF returns 41 bps behind formula rates

Explore the reasons behind PPF returns being 41 bps behind the formula rates.

There are several reasons why PPF returns may be 41 basis points (bps) behind formula rates. Here are some key points to consider:

Government Determined Interest Rate: The PPF interest rate is set by the government and is influenced by various economic factors. It may not always align perfectly with formula rates.
Spread over Government Securities: PPF rates are typically linked to the 10-year government bond yield. However, the government bonds have a higher risk compared to the PPF, which leads to a lower interest rate for PPF.
Administrative Costs: The PPF scheme involves administrative costs, which reduces the overall returns. These costs cover various expenses like maintenance, operation, and management of the scheme.
Tax Benefits: PPF offers tax benefits, including tax-free interest and tax deduction under Section 80C of the Income Tax Act. These benefits result in lower returns as compared to formula rates.
Longer-Term Commitment: PPF has a fixed maturity period of 15 years, and premature withdrawal is allowed only under specific circumstances. This commitment may result in slightly lower returns compared to formula rates.

Overall, these factors contribute to the variance between PPF returns and formula rates, with the difference being around 41 bps.

Answered a year ago

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