PPF: Know how your interest is calculated

Here is what investors should know about the Public Provident Fund (PPF) and why they need to put in funds into this scheme before the fifth of any month.

Recently, the government raised interest rates on most small saving schemes, except the PPF. Do note that the provident fund comes with a long tenure of 15 years.

The interest rate on PPF at 7.1% per annum for the quarter of April to June 2023 has remained static since April 2020.

Despite there being no hike in rates, the PPF scheme still looks attractive on a post-tax basis as the interest earned on this investment is exempt from tax under both the old and the new tax regime.

Under the old tax regime, the investment amount in PPF is also eligible for tax deduction under Section 80C of the Income Tax Act of up to ₹1.5 lakh per annum. Further, PPF interest rates are generally higher than long-tenure fixed deposits offered by banks.

The interest rates applicable on investments in PPF are notified by the government on a quarterly basis. Interest at applicable rates for each quarter gets credited to the investors’ account at the end of each financial year and compounds annually.

The interest calculation for each calendar month takes into account the lowest balance in the account between the fifth day and the end of the month.

For example, consider that you have a closing PPF balance of ₹1 lakh as of 31 March. If you invest ₹50,000 further in April, the closing balance for April would be ₹1.5 lakh. Interest for the month of April will be calculated on ₹1.5 lakh if ₹50,000 is invested on or before 5 April. Otherwise, it would be calculated on ₹1 lakh only.

Thus, to maximise the returns on PPF, one must invest in PPF on or before fifth of any month.

The minimum and the maximum limits of investment in a PPF account per financial year are ₹500 and ₹1.5 lakh, respectively.