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Wednesday, February 3, 2016

8.7% interest rate on PPF! Are you getting that much?

The interest rate on PPF is 8.7%. Most of the times, we will just believe it. Every year some interest amount will be deposited in our account. How many of us really tried to check whether the interest amount is 8.7% of the principle or less than that?

Well, I never did this exercise before. But for some reason, I ended up checking it recently. I realized, that the interest deposited never matched the 8.7% level. Infact, for the first year, it was meager 4.3%, then it increased to somewhere around 5.8% and recently for the last year it was 6.7% of the total principle present in the PPF account. I tried many ways considering simple interest, compound interest and all the formulae, I have learn, related to interest calculations.
Nothing matched to the offered 8.7%
This got us at home thinking and we ended up googling. Somewhere down the line, we came to know one thing, which these bank people never share with us. 
Most of us end up depositing money in PPF account, just when, we are asked byour office to submit the receipts of all the investments, we have made for the year. Roughly, this time is around mid December or early January. So, it is just two months before financial year ends, that we submit our contribution towards PPF in the account. 
The ideal way for getting 8.7% PPF interest is to submit 12 equal installments, one every month between the dates 1-5 of every month. The interest is given every month based on the amount present in the account between the dates 1-5 of every month. If the investment is done way, then at the end of the year, the interest offered on the PPF account should come out to be 8.7%.
There is another option of depositing all 12 installments in the beginning of the year itself i.e. between 01-05 April. But, according to some calculation(which I have not yet tried), the interest obtained by this method is less than the interest obtained for monthly deposit of installment.
I am going to try doing it this year and see if it actually works and yields an interest upto 8.7%.
Guess, banks doesn't really share everything with us.