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

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.

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.

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