PublicProvidentFund(PPF)Interestrate/Interestrate

calculation
The interest earned on PPF is not fixed but benchmarked to Government
securities. The government declares the interest rate payable on PPF every financial
year. Generally government declares the PPF interest rate, for the next financial
year, in the last week of March.
PPF offers 25 basis points higher than the yield of 10-year government bonds. Thus
the rate of interest earned on PPF may come down if Govt. bond yield comes down
and may go up in case the yield goes up.
For fiscal year 2015-16 government has announced interest rate of 8.70 per
cent. which is same as the last fiscal year.
Update: As per recent announcement rate of interest has been reduced
to 8.1% forFY2016-17. Also the rates are to be reviewed every three months so
the rate of 8.1% is for the period April 1, 2016 - Jun 30, 2016. It will be reviewed
on quarterly basis and may change every quarter.
One of the biggest point going in the favour of PPF is that the interest earned on
the scheme is completely tax free.
PPF interest rate calculation
It is very important to know how the interest on the PPF is calculated so that the
rate of return on that investment can be maximized by investing amount at the
proper time.
The interest on balance in your PPF account is compounded annually and is credited
at the end of the year. But the point to remember is that the interest
calculation is done every month which means the interest is calculated on
lowest balances in account between 5th and last day of the month. So if you don't
deposit on or before the 5th of a month, you don't earn interest for that
month.
To make it a little technical; in case of monthly interest calculation, interest bearing
balance method is used. Formula for the same is
Interest = Total Amount x 1/12 x Rate/100
Where total amount is the amount in the PPF account at any given month end.
As Example -

If total amount in the PPF account at the end of any given month is Rs. 1,00,000
then interest for that month would be (Considering the interest as 8.7%).
Interest = 100000 x (1/12 x 8.7/100)
= 100000 x 0.00725
= 725

Going by that method if we take three scenarios

Rs. 60,000 deposited between Apr 1st and Apr 05.

Rs. 5,000 deposited every month between the 1st and 5th of that particular
month.
Rs. 5,000 deposited every month after the 5th of that particular month.
Considering the interest as 8.7% the interest earned at the year end for these
3 scenarios would be.

Rs. 5,220 when Rs. 60,000 deposited between Apr 1st and Apr 05.
Around Rs. 2850 when Rs. 5,000 deposited every month between the 1st
and 5th of that particular month.
Around Rs. 2400 when Rs. 5,000 deposited every month after the 5th of that
particular month.
It's easy to see that lump sum investment at the start of the year (between Apr 1st
and Apr 5th) will fetch the highest return.
Points to note -

Current rate of interest is 8.7%.

Minimum deposit of Rs. 500 has to be done in a fiscal year otherwise PPF
account will be deactivated.
Ideal scenario would be to deposit 1,50,000 between Apr 1st and Apr 5th in
order to fetch maximum interest. A nice article for the best time to investment can
be seen here - http://www.ppfaccount.in/ppf-investment-period.html
Make sure to deposit between 1st and 5th of the month in order to get
interest for that particular month.
PPF is EEE investment which means PPF is exempted from tax across all
three stages of investment.
That's all for this topic Public Provident Fund (PPF) Interest rate/Interest
rate calculation. If you have any doubt or any suggestions to make please drop a
comment. Thanks!