PPF interest rate: A complete guide to understanding and calculating returns

PPF interest rate

PPF, short for Public Provident Fund, is a long-term investment scheme popular among individuals who want to earn higher, but stable returns. In other words, PPF is ideal for individuals with low-risk appetite. The government of India mandates this investment scheme, which is not market-linked. One of the benefits of PPF is that it is a long-term savings and investment vehicle that offers attractive interest rates along with income tax benefits. This blog post gives an overview of everything related to PPF interest rate. Let’s dig in.

Overview of PPF interest rates

PPF interest rate refers to the rate of interest that applies to investments made in the PPF scheme. The interest rate is set by the Ministry of Finance, Government of India, and is subject to periodic revisions. The current PPF interest rate is 7.1% per annum. The interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.

The investor’s PPF account receives the applicable interest rates for every quarter, which is compounded and credited annually. 

Historical PPF interest rates

The PPF scheme was introduced by the Government of India under the PPF Act of 1968 to encourage savings among individuals. The product was initially available only at post offices but in 1986, the scheme was extended to designated public sector banks, making it more accessible to the public.

At the time of inception, the PPF interest rate was 4.8%, but it went as high as 12% at some point. Over the past decade, the PPF interest rate has fluctuated between 7.1% and 8.8%. For a more detailed overview of the history of PPF interest rates, refer to the table below: 

PPF interest rate history since inception

PeriodInterest Rate
01.04.1968 to 31.03.19694.80
01.04.1969 to 31.03.19704.80
01.04.1970 to 31.03.19715
01.04.1971 to 31.03.19725
01.04.1972 to 31.03.19735
01.04.1973 to 31.03.19745.30
01.04.1974 to 31.07.19745.80
01.08.1974 to 31.03.19757
01.04.1975 to 31.03.19767
01.04.1976 to 31.03.19777
01.04.1977 to 31.03.19787.50
01.04.1978 to 31.03.19797.50
01.04.1979 to 31.03.19807.50
01.04.1980 to 31.03.19818
01.04.1981 to 31.03.19828.50
01.04.1982 to 31.03.19838.50
01.04.1983 to 31.03.19849
01.04.1984 to 31.03.19859.50
01.04.1985 to 31.03.198610
01.04.1986 to 31.03.198812
01.04.1988 to 31.03.199912
01.04.1999 to 14.01.200012
15.01.2000 to 28.02.200111
01.03.2001 to 28.02.20029.50
01.03.2002 to 31.03.20029.00
01.04.2002 to 28.02.20039
01.03.2003 to 31.03.20118
01.04.2011 to 30.11.20118
01.12.2011 to 31.03.20128.60
01.04.2012 to 31.03.20138.80
01.04.2013 to 31.03.20148.70
01.04.2014 to 31.03.20168.70
01.04.2016 to 30.09.20168.10
01.10.2016 to 31.03.20178
01.04.2017 to 30.06.20177.90
01.07.2017 to 30.09.20177.80
01.01.2018 to 30.09.20187.60
01.10.2018 to 30.06.20198.00
01.07.2019 to 31.03.20207.90
01.04.2020 to 30.09.20207.10
01.10.2022 to 31.12.20227.10
01.01.2023 to 31.03.20237.10
Source: Post Office

How PPF interest is calculated

Put simply, PPF interest is calculated based on the monthly balance as we have seen above. Let’s break down the process into three parts: 

  1. Monthly balance calculation: The interest for each calendar month is determined by considering the minimum balance in the PPF account between the fifth day and the last day of that month.
  2. Compounding: The interest earned on the PPF account is compounded annually. The interest for each month is added to the principal amount at the end of the financial year, and subsequent interest calculations are made on the new total.
  3. Annual interest: While the interest is calculated on a monthly basis, it is credited to the investor’s PPF account at the end of each financial year. 

Investors benefit from the magic of compounding as it allows their PPF accounts to generate earnings on both the principal amount and the previously accrued interest.

Tax benefits of PPF

Investors with a PPF account can start with a minimum deposit of ₹500, with the option to deposit up to a maximum of ₹1.50 lakh. Contributions can be made in any number of installments, ranging from ₹50 to ₹1.50 lakh, providing flexibility to depositors within the specified fiscal year. With a PPF account, investors get several benefits, the most important one being the EEE tax-saving benefit: 

  • EEE (Exempt-Exempt-Exempt) status: The PPF scheme comes under the EEE or Exempt-Exempt-Exempt category, which means earnings, gains, and withdrawals are tax-free. In other words, the principal amount, interest earned, and maturity amount are all exempted from Income Tax.

Benefits of investing in PPF

Many individuals invest in the PPF as the scheme offers several benefits. Here are some major advantages of having a PPF account:

  • Competitive interest rates: PPF offers competitive interest rates compared to other traditional savings instruments. The interest rates are set by the government of India and they are typically higher than those offered by regular savings accounts.
  • Safety: PPF being a government-backed savings scheme offers complete safety for investor deposits. The government ensures that the invested capital is protected, making it a low-risk investment option.
  • Long-term wealth-building opportunities: PPF has a lock-in period of 15 years, providing a disciplined, long-term savings avenue. It also provides maximum returns to investors with attractive and compounding interest rates.

PPF vs. Fixed Deposit (FD)

Public Provident Fund (PPF) and fixed deposits (FD) are two popular investment schemes. However, the two investment vehicles are poles apart and investors should do well to understand the differences. Let’s look at some of the key differences and advantages of both: 

  • Tax implications: PPF falls under the EEE (Exempt-Exempt-Exempt) category, with the principal, interest earned, and maturity amount being tax-free. Contributions are eligible for deductions under Section 80C. For fixed deposits (FD), interest earned is taxable, and TDS (Tax Deducted at Source) may be applicable.
  • Interest rates: The current interest rate on PPF is 7.1 percent which is fixed by the government every quarter. The interest rates on FDs typically vary from one financial institution to another, usually ranging between 3.5% to 7.5% annually. 
  • Liquidity: PPF has a lock-in period of 15 years, and partial withdrawals are allowed after five years of investment or under specific circumstances. Fixed deposits generally have a fixed tenure, though premature withdrawals are permitted with penalties. Besides, FD tenure is flexible unlike the PPF and individuals can choose the investment period. 
  • Purpose: PPF is often considered a long-term savings instrument suitable for retirement planning and wealth creation. Fixed deposits are for both short-term and medium-term goals, such as saving for a specific expense or creating an emergency fund.

How to maximize returns with PPF

The PPF scheme follows strict rules mandated by the government. However, investors can play a vital role in maximizing returns. 

  • Investing before the 5th of every month. PPF interest is calculated on the lowest balance between the 5th and last day of every month. 
  • Not delaying any investment till the end of the year as it reduces PPF return. 
  • Consistent monthly contributions help in averaging out the investment.
  • Investing a significant amount you can afford (up to Rs 1.5 lakh) at the start of the financial year to get the full benefit of compounding. 

Below is the formula to calculate interest on PPF:

F = P[((1+i)n-1)/i]

Here, F stands for the maturity proceeds of the PPF, P stands for annual installments, n stands for the number of years, and I stands for the rate of interest divided by 100. The formula considers the lowest balance between the fifth day and the end of the month and calculates interest based on the annual interest rate, divided by 12 for monthly compounding.

Conclusion

To sum up, PPF is a long-term investment scheme favored by risk-averse individuals who seek stable returns. Overseen by the Indian government, PPF is a secure and tax-efficient investment option. Consider PPF as part of your long-term savings and investment strategy for financial security and growth.

FAQs

Is PPF better than FD?

Ans. In the case of FDs, the Deposit Insurance and Credit Guarantee Corporation (DICGC) protects your investments up to ₹5 lakhs per depositor per bank. PPF is also a low-risk investment choice because it is fully backed by the government. However, the final decision rests with the individual investor depending on his financial goals.

Q. What is the tenure of a PPF deposit? 

Ans. The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years if you wish to. PPF allows a minimum investment of ₹500 and a maximum of ₹1.5 lakh in a financial year.

Q. How much will a PPF account fetch @Rs.10,000 per month?

Ans. By investing ₹10,000 per month (or ₹10,000×12 = ₹1,20,000 per year), you can get up to ₹35 lakh upon maturity after 15 years. The above calculation clearly shows that PPF is still a good option if you want to accumulate a lump sum amount over a long period.

Q. Can I invest 2 lakh rupees in PPF in a year?

Ans. You cannot deposit more than Rs. 1.5 lakhs in a PPF account in a financial year.

Q. Is PPF better than LIC?

Ans. While the PPF scheme would help you create a long-term, tax-efficient corpus, the life insurance policy would provide financial security to your family in case of your death, plus tax savings. So, as you plan for your goals, you can secure your planning with life insurance. So, rather than LIC vs. PPF, you can consider investing in both and maximize tax savings.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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