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Reader Comment: PPF Interest Calculation

There was a doubt from a commenter:

One question regarding PPF.
http://www.rediff.com/getahead/2005/may/06ppf.htm

Please read "How to make it work to your benefit."
What they are saying is that interest is calculated only in the month of March. I find it very surprising if that is the case. And I typically put 70k in April itself so am I effectively losing money?

From the PPF Rules:

Interest – Interest at the rate , notified by the Central Government in
official gazette from time to time, shall be allowed for calendar month on the
lowest balance at credit of an account between the close of the fifth day and
the end of the month and shall be credited to the account at the end of each
year.

Meaning- the interest is calculated for every month. It’s only credited at the end of each year. So if you put in Rs. 5000 on the first of every month, the interest calculation will be:

April: Principal of Rs. 5,000 
May: Principal of Rs. 10,000
June: Principal of Rs. 15,000

and so on. The funda is that the interest in April will not apply as principal for May. Only next March, the entire interest for the year is calculated, and then is applicable for the principal starting the next April.

  • Anonymous says:

    >Deepak,

    since when did you start writing in a language that a layman can't understand,
    According to my understanding after reading your blog and following sentence from the rediff article

    "Put your money in a bank fixed deposit that matures by February. On maturity, put it in the PPF account. This way, your money works harder for you."

    So putting everything on april 1st is a better choice if post tax FD return is lower than non-compounded PPF. ( assuming I do not want to put it any other risky stuff )

  • Deepak Shenoy says:

    >Anon: You're right – the article does suggest that PPF accounts funded in march makes sense. I think it's just wrong – the pf rules are clear that interest is calculated for each month, just not compounded.

    FDs are also the same way – usually they are only compounded quarterly. And you're right: post tax FD return needs to be better than non compounded PF – though at 8.5% i doubt you could find an FD matching the criteria.

  • vimala says:

    >very good Article. Want to know more about PPF then check the following link http://moneyrumors.blogspot.com

  • alap says:

    >You have Dear Mr. Deepak,

    You cleared ALL my doubts regarding the PPF Interest Calculation.
    I had read the article on rediff.com: http://www.rediff.com/getahead/2005/may/06ppf.htm

    It clearly stated that Interest is calculated ONLY in March & that too on the Total/lumpsome Balance(Lowest).
    This can be simply be interpreted as : DO Not invest in PPF TILL End February & Put Lumpsom 70,000/- Between 1st & 4th March. This way, you will utilize the money for a whole Year & YET make FULL USE & Earn FULL INTEREST for THAT Financial Year.

    You have stated this is WRONG. Interest is Calculated EVERY Month & Added at The END. SO, Money invested in May/June will earn MORE Interest than Money invested in Jan/Feb.

    So the Basic Calculation to be considered is as follows:

    Amount Invested: A
    Month: N [April = 1…….Feb = 11 (1 to 11)]
    Interest = [(A x 0.08) x N] / 12
    Calculate this for EACH Month & the Summation of ALL Values gives you the Interest for that Particular Financial Year

  • Anonymous says:

    >wats is the current rate of interest for PPF