The cuts are fairly steep and will hit investors hard, especially in a year when the completely tax-free nature of Employees Provident Fund (EPF) has also changed, especially for high income earners. Experts say that the practice of offering higher than market rate of interest will gradually be done away with and this is a reality that investors will have to accept.
“This was inevitable since the government has been indicating for some time that rates on small savings instruments would be aligned to the yield on the 10-year G-Sec,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.
PPF’s return is still decent compared to alternatives, according to experts. Says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors, “While its attractiveness has reduced, a tax-free rate of 6.4 per cent is still reasonable for people in higher tax brackets, compared to, say, bank fixed deposits.” According to Raghaw, “PPF’s attractiveness will now lie mostly in its tax-free nature and the absence of credit risk.”
Among alternatives, investors may look at tax-free bonds from the secondary market. “The yields on these instruments are around 4.5 per cent, but there is no limit on how much investors can invest in them. On PPF
there is a limit of Rs 1.5 lakh per annum,” says Dhawan.
Investors who are willing to take some risk may also opt for medium to longer duration bond funds. Medium duration funds have given a return of 7.25 per cent over the past year while longer-duration funds have returned 7.64 per cent.
“However, investors will have to be prepared for volatility and will have to ride it out with a longer investment horizon,” says Dhawan. Investors may also opt for target maturity debt mutual funds that fund houses have launched in recent times. The taxation—20 per cent with indexation if the fund has been held for more than three years—could result in attractive post-tax return from debt funds.
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