The interest earned on PPF is not fixed but benchmarked to Government securities. The government declares the interest rate payable on PPF every financial year. Generally government declares the PPF interest rate, for the next financial year, in the last week of March.
PPF offers 25 basis points higher than the yield of 10-year government bonds. Thus the rate of interest earned on PPF may come down if Govt. bond yield comes down and may go up in case the yield goes up.
For fiscal year 2015-16 government has announced interest rate of 8.70 per cent. which is same as the last fiscal year.
Update: As per recent announcement rate of interest has been reduced to 8.1% for FY2016-17. Also the rates are to be reviewed every three months so the rate of 8.1% is for the period April 1, 2016 - Jun 30, 2016. It will be reviewed on quarterly basis and may change every quarter.
One of the biggest point going in the favour of PPF is that the interest earned on the scheme is completely tax free.
PPF interest rate calculation
It is very important to know how the interest on the PPF is calculated so that the rate of return on that investment can be maximized by investing amount at the proper time.
The interest on balance in your PPF account is compounded annually and is credited at the end of the year. But the point to remember is that the interest calculation is done every month which means the interest is calculated on lowest balances in account between 5th and last day of the month. So if you don't deposit on or before the 5th of a month, you don't earn interest for that month.
To make it a little technical; in case of monthly interest calculation, interest bearing balance method is used. Formula for the same isInterest = Total Amount x 1/12 x Rate/100
Where total amount is the amount in the PPF account at any given month end.As Example -
If total amount in the PPF account at the end of any given month is Rs. 1,00,000 then interest for that month would be (Considering the interest as 8.7%).
Interest = 100000 x (1/12 x 8.7/100) = 100000 x 0.00725 = 725
Going by that method if we take three scenarios -
- Rs. 60,000 deposited between Apr 1st and Apr 05.
- Rs. 5,000 deposited every month between the 1st and 5th of that particular month.
- Rs. 5,000 deposited every month after the 5th of that particular month.
Considering the interest as 8.7% the interest earned at the year end for these 3 scenarios would be.
- Rs. 5,220 when Rs. 60,000 deposited between Apr 1st and Apr 05.
- Around Rs. 2850 when Rs. 5,000 deposited every month between the 1st and 5th of that particular month.
- Around Rs. 2400 when Rs. 5,000 deposited every month after the 5th of that particular month.
It's easy to see that lump sum investment at the start of the year (between Apr 1st and Apr 5th) will fetch the highest return.
Points to note -
- Current rate of interest is 8.7%.
- Minimum deposit of Rs. 500 has to be done in a fiscal year otherwise PPF account will be deactivated.
- Ideal scenario would be to deposit 1,50,000 between Apr 1st and Apr 5th in order to fetch maximum interest. A nice article for the best time to investment can be seen here - http://www.ppfaccount.in/ppf-investment-period.html
- Make sure to deposit between 1st and 5th of the month in order to get interest for that particular month.
- PPF is EEE investment which means PPF is exempted from tax across all three stages of investment.
That's all for this topic Public Provident Fund (PPF) Interest rate/Interest rate calculation. If you have any doubt or any suggestions to make please drop a comment. Thanks!
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