Contents
Overview
Public Provident Fund(PPF) is one of the most popular investment products in India. Among the various fixed income instruments, it is one of the best investment options. Not only does it offer an attractive interest rate but the interest earned is also fully tax free. One more important thing to note is that although the PPF interest is calculated every month, it is credited to the investor’s account only at the end of the financial year.
For the ease of my explanation, I am considering the following two ways in which a typical investor can invest in PPF:
- Lumpsum contribution
- Monthly contributions.
Let us see how the interest is calculated in the above two cases.
Lumpsum contribution in PPF
In this mode, the investor invests a lumpsum amount of money for the entire year and does not invest again for that financial year. Let us assume that he/she invests the maximum amount of Rs.1,50,000 and the rate of interest is 7.6% per annum. In that case, below is a rough illustration of how the interest is calculated every month for that financial year.
| Date of Deposit | Contribution | Balance on 5th of Month (Rs.) | Balance on End of month (Rs.) | Minimum balance (Rs.) | Interest credited (Rs.) |
| 02-Apr-17 | 1,50,000 | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 06-May-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 07-Jun-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 03-Jul-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 03-Aug-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 04-Sep-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 05-Oct-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 07-Nov-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 07-Dec-17 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 04-Jan-18 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 04-Feb-18 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 04-Mar-18 | – | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 |
| 11400.00 |
In the above table, the yearly interest on the lumpsum amount of Rs.1,50,000 is 7.6/100 x 150000 = Rs.11400. Hence the monthly interest will be 11400/12 = Rs.950 per month. But this interest of Rs.11,400 will be credited to the investor’s account only at the end of the current financial year(Note: Typically a financial year starts on April and ends on March the next year).
Monthly contributions in PPF
Now let’s say that instead of a lumpsum contribution at the beginning of a year, someone prefers to invest on a monthly basis. Let’s say that he/she decides to invest an amount of Rs.12,500 every month at a rate of 7.6% per annum. In that case, the interest calculation will be roughly as under:
| Date of Deposit | Balance on 5th of Month (Rs.) | Balance on End of month (Rs.) | Minimum balance (Rs.) | Interest credited (Rs.) | If deposit is before 5th, Interest would be (Rs.) |
| 02-Apr-17 | 12,500 | 12,500 | 12,500 | 79.17 | 79.17 |
| 06-May-17 | 12,500 | 25,000 | 12,500 | 79.17 | 158.33 |
| 07-Jun-17 | 25,000 | 37,500 | 25,000 | 158.33 | 237.50 |
| 03-Jul-17 | 50,000 | 50,000 | 50,000 | 316.67 | 316.67 |
| 03-Aug-17 | 62,500 | 62,500 | 62,500 | 395.83 | 395.83 |
| 04-Sep-17 | 75,000 | 75,000 | 75,000 | 475.00 | 475.00 |
| 05-Oct-17 | 87,500 | 87,500 | 87,500 | 554.17 | 554.17 |
| 07-Nov-17 | 87,500 | 1,00,000 | 87,500 | 554.17 | 633.33 |
| 07-Dec-17 | 1,00,000 | 1,12,500 | 1,00,000 | 633.33 | 712.50 |
| 04-Jan-18 | 1,25,000 | 1,25,000 | 1,25,000 | 791.67 | 791.67 |
| 04-Feb-18 | 1,37,500 | 1,37,500 | 1,37,500 | 870.83 | 870.83 |
| 04-Mar-18 | 1,50,000 | 1,50,000 | 1,50,000 | 950.00 | 950.00 |
| 5858.33 | 6175.00 |
The total interest credited into your account is Rs 5,858.33 for that financial year. Had you been depositing your money into the PPF account on or before 5th of every month, then you would have earned Rs 316.67 more in the financial year.
Also read: PPF vs ELSS-Which is a better tax saving investment option?