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The Public Provident Fund (PPF) forms a large part of the financial portfolio of Indian consumers with low to zero risk appetite and relatively high interest earning needs. PPF comes with a sovereign guarantee on depositors’ money by the Indian federal government, whereas, earning professionals can also avail of tax benefits on their PPF investment.
That said, understanding the process of calculating PPF returns becomes important for subscribers to find out an estimation of their deposit, the interest, and the maturity amount.
Forbes Advisor India has prepared a detailed guide to help subscribers calculate their PPF returns as it can have great significance in one’s personal financial planning.
Formula to Calculate PPF Interest and Maturity
A Public Provident Fund calculates the maturity value of your investment based on your annual payments and the prevailing interest rate.
Although the PPF rates are announced every quarter, the calculation of your investments are done on a month-on-month basis, taking the lowest balance in the account available between the fifth day and to the month’s end. However, the maturity amount is credited to the account holder’s account at the end of the financial year.
For example, say X has made a deposit INR 1 lakh on a PPF savings scheme and plans to continue the investment for 15 years. With the prevailing interest rate of 7.1%, X’s maturity amount in 15 years using the following formula will be:
M = P [ ( { (1+i) ^ n} – 1) / i ]
M = Maturity value = ?
P = Annual payments = 1,50,000
i = Interest rate = 7.1%
n = Number of years = 180 months (15 years)
M = 1 lakh [ ( { (1 + 7.1%) ^ 180 } – 1 ) / 7.1% ] x (1 + 0.07)
M = INR 40.68 lakh
Therefore, X’s deposit of INR 22.5 lakh in 15 years will fetch INR 18.18 lakh interest after 15 years, giving him a maturity value of INR 40.68 lakh in total.
The PPF rate is calculated on a monthly basis, taking the lowest balance in the account available between the fifth day and to the month’s end. The maturity amount is credited to the account holder’s account at the end of the financial year.
Interest Rate of PPF over the Years
The Ministry of Finance announced the change in the interest payment frequency of small saving schemes, including PPF, to a quarterly basis from the second quarter of 2016.
The interest rate of PPF for the quarter starting July 1, 2023 to Sep. 30, 2023, remains unchanged at 7.10% per annum. In the quarter ending March 31, 2020, the small savings scheme was providing returns at the rate of 7.90% per annum.
Here is the last of the returns provided by PPF over the years.
Features and Benefits of PPF
The small savings PPF account is provided by the National Savings Institute of India (NSII), under the Department of Economic Affairs of the Ministry of Finance. PPF is currently offering 7.10% interest per annum. Its major features include:
Account Type
The savings bank can be opened from any authorized bank and post office branch by resident individuals, or guardians on behalf of minors. PPF accounts are suitable for all consumers with a low to zero risk appetite.
Investment
The account can be opened with a minimum deposit of INR 500 and a monthly deposit in multiples of INR 50 and not exceeding a maximum limit of INR 1.5 lakh in a single financial year. A PPF account holder can choose to deposit the fund either monthly or on a lump sum basis.
Investment Tenure
PPF comes with a lock-in period of 15 years. However, the account holder can extend it for another five years within one year from the date of maturity upon submission of application in Form 4.
Interest Rate
The Ministry of Finance announces interest rates on PPF every quarter. Although the rate is calculated on a month-on-month basis, taking the lowest balance in the account between the fifth day and to the month’s end, the maturity amount is credited at the end of the financial year.
Premature Withdrawal
A PPF account can be closed prematurely only after five years on account of change in residency address, medical treatment, and higher education.
Withdrawal on Maturity
A PPF account holder can choose to close the small savings account after a lock-in period of 15 years.
Tax Benefit
Deposits on PPF are subject to triple tax deduction, which means it enjoys the benefit of EEE (exempt exempt exempt) status on deposit, interest, and the maturity amount. Taxpayers can claim up to INR 1.5 lakh tax deduction on their PPF investment in each financial year under section 88 of the Income-tax Act, 1961.
Loan Benefit
A PPF account holder can apply for up to 25% of the balance amount as a loan after completion of three years and up to to five years of opening an account at 1% rate of interest. The loan has to be repaid within three years, or face the penal interest at the rate of 6% per annum.
Nomination
PPF account holders can add nominees in the name of one or more people as well as define the shares each may receive.
Risk Level
Low to zero.
Frequently Asked Questions (FAQs)
When is the interest rate on PPF calculated?
The rate of interest on PPF is announced every quarter. The interest is calculated on a month-on-month basis, taking the lowest balance in the account available between the fifth day and to the month’s end.
The maturity amount is credited at the end of the financial year.