Interest does not take holidays. That’s right. When you take a loan, you pay interest for every day you have borrowed. When you make a fixed deposit, the bank pays you interest for each day. For interest, there is no concept of working and non-working days, festivals, and national holidays.
However, in the case of Public Provident Fund (PPF), interest does take a break. How? For that, we must dig deeper into how PPF interest calculation works.
How Does Interest Calculation Work in PPF?
PPF interest rate, as we know, is announced by the Ministry of Finance every quarter. For the ease of calculation, let’s assume the PPF interest rate remains unchanged throughout the year. PPF interest is calculated every month but is credited to your account only at the end of the financial year. Therefore, the interest added to your PPF account at the end of the financial year will be the sum of monthly interest for the 12 months.
So far so good. Here comes the twist. PPF interest is calculated on the lowest balance between the 5th of the month and the end of the month.
Therefore, if you deposit Rs 1.5 lacs in PPF on 6th April, this amount will earn interest for only 11 months. And not 11 months 25 days. The interest has indeed taken a holiday. Had you deposited the amount a day earlier (April 5), you would have earned interest for the entire 12 months.
Note that PPF is a borrowing by the Government of India. The interest calculation mechanism is specified in the PPF Act. Therefore, while you open a PPF account with banks and post offices, they have no say in interest calculations.
And this rule is not just applicable to the month of April. That’s how it is for all the months.
What Difference Does This Make?
To be honest, not much.
Let’s say, at the end of FY2022 (as on March 31, 2022), both you and I have Rs 10 lacs in our PPF account.
You invest Rs 1.5 lacs in the account of April 5, 2022. I am lazy and invest Rs 1.5 lacs in the PPF account on April 6, 2022.
Let’s further assume that the PPF interest stays constant at 7% p.a. during the year. Previous year end balance will earn the same interest for both of us.
10 lacs X 7% = 70,000
Since you invested on April 5, your fresh investment in the year will earn interest for 12 months. Rs 1.5 lacs X 7% = Rs 10,500
I invested on April 6, I will earn interest for 11 months. Rs 1.5 lacs X 7% X 11/12 = Rs 9,625
Your balance at the end of FY2023 (March 31, 2023) = Rs 10 lacs + 1.5 lacs + 70,000 + 10,500 = Rs 12,30,500
My PPF balance at the end of FY2023 (March 31, 2023) = Rs 10 lacs + 1.5 lacs + 70,000 + 9,625 = Rs 12,29,625
A difference of only Rs 875. Does not seem big enough to worry too much about.
How Much Difference Will This Make over 15 Years?
Let’s assume you open your account on April 5, 2022. I open on April 6, 2022. These accounts will mature on March 31, 2038. You have an option to extend these accounts in blocks of 5 years but let’s not go there.
Both of us invest Rs 1.5 lacs every year. You invest on April 5. I invest on April 6. What will be the difference in maturity amounts?
| Investment on April 5 each year. PPF interest rate: 7% | ||||
| Year | PPF Balance at the start of the year | Investment in the year | Interest for the year | Year end balance |
| 1 | – | 150,000 | 10,500 | 160,500 |
| 2 | 160,500 | 150,000 | 21,735 | 332,235 |
| 3 | 332,235 | 150,000 | 33,756 | 515,991 |
| 4 | 515,991 | 150,000 | 46,619 | 712,611 |
| 5 | 712,611 | 150,000 | 60,383 | 922,994 |
| 6 | 922,994 | 150,000 | 75,110 | 1,148,103 |
| 7 | 1,148,103 | 150,000 | 90,867 | 1,388,970 |
| 8 | 1,388,970 | 150,000 | 107,728 | 1,646,698 |
| 9 | 1,646,698 | 150,000 | 125,769 | 1,922,467 |
| 10 | 1,922,467 | 150,000 | 145,073 | 2,217,540 |
| 11 | 2,217,540 | 150,000 | 165,728 | 2,533,268 |
| 12 | 2,533,268 | 150,000 | 187,829 | 2,871,096 |
| 13 | 2,871,096 | 150,000 | 211,477 | 3,232,573 |
| 14 | 3,232,573 | 150,000 | 236,780 | 3,619,353 |
| 15 | 3,619,353 | 150,000 | 263,855 | 4,033,208 |
| 16 | 4,033,208 | 150,000 | 292,825 | 4,476,033 |
| Investment on April 6 each year. PPF interest rate: 7% | ||||
| Year | PPF Balance at the start of the year | Investment in the year | Interest for the year | Year end balance |
| 1 | – | 150,000 | 9,625 | 159,625 |
| 2 | 159,625 | 150,000 | 20,799 | 330,424 |
| 3 | 330,424 | 150,000 | 32,755 | 513,178 |
| 4 | 513,178 | 150,000 | 45,547 | 708,726 |
| 5 | 708,726 | 150,000 | 59,236 | 917,962 |
| 6 | 917,962 | 150,000 | 73,882 | 1,141,844 |
| 7 | 1,141,844 | 150,000 | 89,554 | 1,381,398 |
| 8 | 1,381,398 | 150,000 | 106,323 | 1,637,721 |
| 9 | 1,637,721 | 150,000 | 124,265 | 1,911,986 |
| 10 | 1,911,986 | 150,000 | 143,464 | 2,205,451 |
| 11 | 2,205,451 | 150,000 | 164,007 | 2,519,457 |
| 12 | 2,519,457 | 150,000 | 185,987 | 2,855,444 |
| 13 | 2,855,444 | 150,000 | 209,506 | 3,214,950 |
| 14 | 3,214,950 | 150,000 | 234,672 | 3,599,622 |
| 15 | 3,599,622 | 150,000 | 261,599 | 4,011,220 |
| 16 | 4,011,220 | 150,000 | 290,410 | 4,451,631 |
Therefore, the difference over 15 years is only about Rs. 24,500. Not much.
However, it is important to be aware of the rules. If you had set up a recurring instruction to transfer Rs 10,000 to your PPF account on 10th of each month, now you know you are better off investing on or before 5th of each month. By the way, PPF is not the only product with such unique interest calculation rules. In Sukanya Samriddhi account (SSY), you must invest before 10th of each month to earn the interest for the month. Plan accordingly.