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How Public Provident Fund (PPF) Account Interest Is Calculated? – With Examples

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Replacement of Direct tax code (DTC) with income tax act 1961 may affect your tax planning in coming years. But one investment which will offer you same exemption even after DTC is PPF. Revised rate of interest (From 8% to 8.6%) and raised investment limit (From 70,000 to Rs 1 lakh) is attracting more investors to invest under PPF to avail tax exemption. But some investors also want to understand how there money will grows under PPF and what is the right time to invest under PPF to get maximum interest. For those investors, today we are going to take a look ‘How PPF account interest rate is calculated?’. But before moving ahead, lets have a look on a small table reflecting the tax benefits of PPF investment.

Public Provident Fund (PPF)

Income Tax Act 1961 Direct Tax code
Investment under PPF get deductions subject to an overall limit of Rs 1Lakh per FY under section 80C Investment under PPF will get the same deduction under DTC.
Interest on PPF is tax free. Interest on PPF will be tax free under DTC.
Withdrawal from PPF account is tax free. Withdrawal from PPF account will be tax free under DTC.

The basic funds of calculating interest of PPF is “The rate of interest on PPF is calculated on the minimum balance between the 5th day to last day of month” and the total interest calculated in the year is added back to the PPF balance at the year end. Which means:-

  • The PPF interest is compounded annually.
  • Interest earned in a year added back to the last year balance amount only at the end of the year.

ppf

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As notified by the Central Government, the revised rate of interest on PPF w.e.f 1st Dec 2011 is 8.6% .

ALSO READ : Revised Interest Rates On PPF, NSC, MIS & Post Office Savings W.E.F 1 Dec 2011.

So lets find out the answer of ‘what is the right time to invest under PPF’ using few different cases:-

Case 1 : Where Mr. X has invested Rs 90,000 in lump-sum on 1st April under PPF.

Case 2 : Where Mr. Y has invested Rs 7500 (Rs 7500*12 = Rs 90,000) under PPF before 5th of every month.

Case 3 : Where Mr. Z has invested Rs 7500 (Rs 7500*12 = Rs 90,000) under PPF after 5th of every month.

Lets see how interest calculation varies in all three cases and determine which approach is best to invest under PPF to get best return on investment.

In Case 1, where Mr. X has invested Rs 90,000 in lump-sum on 1st of April. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

   Monthly Interest           (@ 8.6%)

April Rs 90,000 Rs 90,000 Rs 645
May Rs 0 Rs 90,000 Rs 645
June Rs 0 Rs 90,000 Rs 645
July Rs 0 Rs 90,000 Rs 645
August Rs 0 Rs 90,000 Rs 645
September Rs 0 Rs 90,000 Rs 645
October Rs 0 Rs 90,000 Rs 645
November Rs 0 Rs 90,000 Rs 645
December Rs 0 Rs 90,000 Rs 645
January Rs 0 Rs 90,000 Rs 645
February Rs 0 Rs 90,000 Rs 645
March Rs 0 Rs 90,000 Rs 645

Interest Calculation : Rs 90,000/12 = Rs 7500 *8.6% = Rs 645.

Total Interest accumulated at the end of the year in Mr. X PPF account is Rs. 7740

Total PPF balance at the end of the year in Mr. X PPF account is Rs 97,740 (Rs 90,000 + Rs 7740)

 

In Case 2, where Mr. Y has invested Rs 7500 each month before 5th day of every month. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

      Monthly Interest         (@ 8.6%)

April Rs 7500 Rs 7500 Rs 60
May Rs 7500 Rs 15,000 Rs 108
June Rs 7500 Rs 22,500 Rs 161
July Rs 7500 Rs 30,000 Rs 215
August Rs 7500 Rs 37,500 Rs 269
September Rs 7500 Rs 45,000 Rs 323
October Rs 7500 Rs 52,500 Rs 376
November Rs 7500 Rs 60,000 Rs 430
December Rs 7500 Rs 67,500 Rs 484
January Rs 7500 Rs 75,000 Rs 538
February Rs 7500 Rs 82,500 Rs 591
March Rs 7500 Rs 90,000 Rs 645

Interest Calculation : Rs 7500/12 = Rs 625*8.6% = Rs 60.

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Total Interest accumulated at the end of the year in Mr. Y’s PPF account is Rs. 4200

Total PPF balance at the end of the year in Mr. Y’s PPF account is Rs 94,200 (Rs 90,000 + Rs 4200)

In Case 3, where Mr. Z has invested Rs 7500 each month after 5th day of every month. Lets see how interest will be calculated in his case over the year.

Month

Fund Deposited

Lowest Balance
(From 5th to end of the month)

       Monthly Interest         (@ 8.6%)

April Rs 7500 Rs 0 Rs 0
May Rs 7500 Rs 7500 Rs 60
June Rs 7500 Rs 15,000 Rs 108
July Rs 7500 Rs 22,500 Rs 161
August Rs 7500 Rs 30,000 Rs 215
September Rs 7500 Rs 37,500 Rs 269
October Rs 7500 Rs 45,000 Rs 323
November Rs 7500 Rs 52,500 Rs 376
December Rs 7500 Rs 60,000 Rs 430
January Rs 7500 Rs 67,500 Rs 484
February Rs 7500 Rs 75,000 Rs 538
March Rs 7500 Rs 82,500 Rs 591

Interest Calculation : Rs 7500/12 = Rs 625*8.6% = Rs 60.

Total Interest accumulated at the end of the year in Mr. Z’s PPF account is Rs. 3555

Total PPF balance at the end of the year in Mr. Z’s PPF account is Rs 93,555 (Rs 90,000 + Rs 3555)

Conclusion:-

So with the above discussion you can conclude, whether you should invest monthly or annually under PPF. The interest rate calculation in PPF accounts are very simple and clear which helps an investor to know what is the write time to make his investment to get maximum interest.

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ALSO READ : Revised Interest Rates On PPF, NSC, MIS & Post Office Savings W.E.F 1 Dec 2011

ALSO READ : Public Provident Fund (PPF) Scheme –Investment Limit, Interest Rate, IT Benefits

ALSO READ : ELSS Verses NSC And PPF

ALSO READ : Check How DTC Will Take Away The Tax Exemptions Available On Small Saving Funds Like PPF, NSC, Post Office Time Deposit, Post Office Saving Account, Post Office RD, Post Office MIS and Senior Citizen Saving Scheme

One comment

  1. Deposit in PPF lump sum on 1.4.12 is benificial. It is a thing I learned to day.Let your service proceed further,
    Thank you,
    Natarajan

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