Why is PPF rate of interest in India so low for a 15-year scheme?
A PPF or an EPF account is just your piggy bank accounted for inflation (sometimes).
You want to keep aside some money for your future without fear of losing it, spending it, depreciating it (thanks to inflation) and with a satisfaction of earning some at least some interest on it. Your options with those conditions are pretty limited if not non-existent. A Provident Fund scheme is essentially government saying that look you guys already trust us with your lives so why don't you give us your money and we will return it to you after 15 years if you want it. That way we can keep aside your money for you without you worrying about it. Since we are government no one can steal from us (we have specially appointed people to do that who are selected through either a rigorous exam or you guys yourselves select and send some people to do that), though we will be spending the money, we will definitely return your money because if you do not trust us who would you trust. If for some reason we are not able to return the money, we will just print more papers and give it to you saying that they have the same value. If you guys are too smart to work out that printing too much of money devalues it, we also promise to give you an interest on it that will cover for the inflation and if you are lucky and the currency doesn't devalue the interest is an added bonus.
Just to sweeten the deal, sometimes they declare that they will not tax your money if you give it to the government willingly.
Long story short, since it is the most safe investment with an added net of sovereign guarantee it is bound to have the lowest rate of interest. Any other investment product carries a risk with it and as the risk increases so does the rate of return or interest in layman's language.
Disclaimer: I gained the above piece of knowledge after a certain time in my investment life so yes, I too have some small investments in PPF and I am actively trying to reduce my investments in PPF and whenever I get an opportunity I keep on withdrawing my EPF.
Why do you consider the interest to be ‘so low'?
The interest from PPF is tax-free and has pretty much exceeded the inflation rate. For the last 2 years, the interest rates are linked to the yields in government bonds and hence you can expect that the rates would be above inflation rate.
With all the other advantages of the scheme, the interest rates definitely look attractive. PPF should form a portion of your debt portfolio.
In a PPF scheme, you are basically lending your money to your Government, which is the safest form of investment, since the government can always return your money by taxation or asking RBI to print money. Because there is low credit risk you get a lower rate of return for your ppf investment.