Helping to bridge the payout gap

SPECIAL DEPOSIT SCHEME/ Continuation gives provident funds a breather

Provident funds (PFs) heaved a sigh of relief as the finance minister today decided to continue with the special deposit scheme (SDS), which would pay 8 per cent interest, for one more year.

This will help PF trusts bridge the gap between investment return on their portfolio and the stipulated payout rate, currently at 9.5 per cent.

The PFs have sizable investment in SDS which was launched by the Centre in July 1975 to provide better returns to non-government provident funds, superannuation and gratuity funds.

The return on SDS at 8 per cent is far higher than the market rate of return which is 6 per cent, said Dara Mehta, managing director, Darashaw & Company.

"However, one has to see this 8 per cent interest relative to the payout, which will be decided later this month," he added.

The finance minister stated in his budgetary address that all interest rates should be aligned to the market except for a couple of exceptions in certain instruments, which would provide a risk-free avenue for all citizens to save for a longer term, and such an instrument should bear a slightly higher rate of interest.

PFs with large exposure to SDS had feared an asset-liability mismatch as the scheme was to have come to an end in June this year.

Fund managers would have had to face a dilemma in deploying the SDS funds, which today continue to earn 8 per cent interest. This is in contrast to interest rates in debt instruments ruling at 5.80-6.50 per cent.

The Reserve Bank of India (RBI) had on January 1 this year, on the advise of the previous government, paid out the interest on the Special Deposit Scheme to provdent fund trusts. In earlier years, the interest was redeployed back into the SDS scheme to earn 8 per cent return on the same.

It is yet to be ascertained whether the government will pay out the interest on SDS later this fiscal or redeploy the same into the scheme.