The Public Provident Fund (or PPF) is among the most attractive and tax-saving positions among all the investment vehicles for long term in India. The PPF scheme is a government saving instrument under the Ministry of Home Affairs.
If you are in any way associated with the investments in PPF or if you have already begun contributing in the scheme onwards, an understanding of the method of calculation of the returns would lead you to better investments thereby allowing you to plan things well. In this article, we will introduce the method for the calculation method of interest rate on PPF and give some examples to demonstrate the process.
Interest Rate on PPF
The rate of interest on PPF is determined by the authorities and also reviewed every quarter (every 3 months) according to economic circumstance. The present interest rate for the quarter ending March 31, 2024 is 7.1% annually compounded.
Remember that the interest rate is indexed for a year through April 1 of the present 12 months until March 31 of the subsequent year. That means the interest rate remains unchanged during this period despite any revisions by the government.
Interest Rate on PPF – Calculation
The interest rate on PPF is calculated as follows:
Interest = (Principal Amount’ Interest Rate’ Time) / 100
Where:
Principal Amount: Total amount invested in the PPF account as at 31 March 2023.
Interest Rate: The current interest rate on PPF for the financial year.
Time: The period of time the investment has been held, in years (or fractions of a year).
Example 1
Assume you own a PPF account having a capital amount of 1,00,000 as of March 31, 2023. The interest rate on PPF for 2023-24 is 7.1% annum. The interest on your PPF account for 2023-24 would be calculated as follows:
Interest = (1,00,000 7.1% 1) / 100
Interest = 7,100
For example, your PPF account would earn 7,100 in interest for the financial year 2023-24.
Example 2
Say you started a PPF account on July 1, 2023, and invested 50,000 in the beginning. Rate of interest on PPF for 2023-24 is 7.1% annually. Interest in your PPF account from July 1, 2023 – March 31, 2024 (nine months or 0.75 years) is computed the following :.
Interest = (50,000 7.1% 0.75) / 100
Interest = 2,662.50
For this example, your interest on your PPF account for the partial year (9 months) would be 2,662.50.
Compounding of Interest under PF
The interest on the PPF is compounded on annual basis, so the interest for the current year deduced from principal is again used as the base amount to calculate interest for the following year. This is due to the effect in which not only one return but each of the returns compound over time. This results in augmented compounded total returns over time.
Example 3
Consider the first example again, however, this time we will compute the interest rate on PPF for the subsequent financial year presuming no further contributions are made to the PPF account.
For 2023-24 the principal amount was 1,00,000 with interest earning 7,100.
For the financial year 2024-25, the principal amount would be 1,07,100 (1,00,000 + 7,100).
To assume the rate of interest for 2024-25 is 7.1% per year, the interest earned for this year will be the following :
Interest = (1,07,100 7.1% 1) / 100.
Interest = 7,604.10
Thanks to the compounding effect, in this example, interest earned in the financial year 2024-25 would be 7,604.10.
Partial Withdrawals & Interest Calculations under PF
Remember that in case you make partial withdrawals from your PPF account throughout the fiscal year, the interest calculation is going to be based upon the principal amount since at the end of the prior financial year much less the amount withdrawn.
Example 4
Just like in Example 1: You had 1,00,000 in principal as of March 31, 2023, therefore interest rate for PPF 2023-24 is 7.1% per year. However you pull 20,000 from your PPF account August 1, 2023.
In this particular instance, interest computation for present financial year 2023-24 is based on 80,000 (1,00,000 – 20,000):.
Interest = (80,000 7.1% 1)/100.
Interest = 5,680
Thus, your PPF account would earn 5,680 interest for 2023-24 (20,000 was partially withdrawn).
Final Words
How interest is calculated on PF registration is important for your financial planning and maximising your returns. The interest calculation is straightforward: the principal amount at the end of the prior financial year, the appropriate rate of interest and the time of keeping the investment. The compounding effect of interest can also boost your total returns over time. Considerations like partial withdrawals and revisions on interest rate on PPF can help you make informed decisions about your investments.
FAQs
- Is there a change in the Interest rate on PPF declared around the year?
Interest rate on PPF is also changed quarterly (every three months) depending on the nation’s economic condition. But the basic rate adjustment is valid for a full year of monetary calculation from April 1 to March 31.
2. Is the PPF interest in a taxable form?
No, PPF takes tax for interest made. This factor can very well be one of the benefits that can be derived from PPF owing to the purpose of saving taxes and building a corpus for the long term like retirement and other similar goals.
3. May I reduce the amount of coverage from my PPF account without interfering with the interest result?
Yes, you may access a part of the overall PPF account balance for the current FY but the benefits of current financial years’ interest may be affected. The interest during the previous year’s end is computed on the principal amount unless the earlier balance was reduced by any withdrawals.
4. Am I restricted to only a fixed amount of invested money per fiscal year?
Indeed, they have set up a cap on the sum each individual can contribute to PPP within a fiscal year.
5. Isn’t the interest earned on PPF compounded annually?
Yes, the PPF amount is compounded yearly. Another thing that we need to understand is that interest calculated each year is added to the principal amount, but not to the previous amount of interest, it is compounded only once each year.
6. How interest calculation is made when I create my PPF account if the half-year is near?
In the event of a PPF account being opened in mid-year, the interest accrual for 1st year is the product of the principal amount deposited and the time for which investment has been made (in fractions – a year). Next year, however, the calculation of interest is made on the conventional basis of simple interest per annum adopted to the principal amount at the end of the outgoing financial year.
