How PPF Returns Are Calculated

Summary

The Public Provident Fund (PPF) is a government-backed savings scheme offering guaranteed returns at 7.1% (as of Q4 FY 2025-26) with complete tax exemption under EEE (Exempt-Exempt-Exempt) — contributions qualify for Section 80C, interest earned is tax-free, and the maturity amount is tax-free. The 15-year lock-in makes it ideal for long-term, risk-free savings.

How it works

Interest calculation

PPF interest is calculated on the minimum balance between the 5th and the last day of each month. This means deposits made after the 5th of a month do not earn interest for that month.

Optimal strategy: Deposit your contribution before the 5th of each month to maximise interest.

Contribution rules

• Minimum: Rs 500/year
• Maximum: Rs 1,50,000/year
• Can be deposited in a lump sum or up to 12 instalments per year
• Account becomes inactive if minimum deposit is not made (reactivation requires Rs 500 x missed years + Rs 50 penalty per year)

Maturity and extension

• Initial tenure: 15 years (from the end of the financial year of opening)
• Can be extended in 5-year blocks indefinitely
• Extension with contribution: continue depositing and earning interest
• Extension without contribution: no deposits, but existing balance continues earning interest

Withdrawal rules

• Partial withdrawal allowed from year 7 onwards (up to 50% of balance at end of year 4 or previous year, whichever is lower)
• Premature closure after 5 years only for serious illness or higher education

Worked example

Rs 1,50,000/year (Rs 12,500/month) for 15 years at 7.1%

1. Total invested: Rs 1,50,000 x 15 = Rs 22,50,000
2. Interest earned: approximately Rs 18,18,209
3. Maturity value: approximately Rs 40,68,209
4. All tax-free (EEE status)
5. Effective yield: 7.1% (no tax erosion, unlike FDs)

For a 30% tax-bracket investor, the equivalent pre-tax FD rate would need to be 7.1% / 0.7 = 10.14% to match PPF after-tax returns.

Inputs explained

• Annual contribution — how much you deposit per year (Rs 500 to Rs 1,50,000)
• Deposit frequency — monthly, quarterly, or annual
• Interest rate — current PPF rate (reviewed quarterly by the government)
• Extension period — whether you plan to extend beyond 15 years

Outputs explained

• Maturity value — total amount receivable after 15 years
• Interest earned — total interest over the tenure
• Year-by-year breakdown — balance, interest, and cumulative figures each year
• Tax saving — Section 80C benefit from annual contributions

Assumptions & limitations

• The interest rate is not fixed for the full tenure. It is reviewed quarterly by the government and can change. However, it has remained at 7.1% for several years.
• Cannot be prematurely closed before 5 years (except in case of death of account holder).
• Only one PPF account per person is allowed (joint accounts are not permitted).
• Returns are lower than equity over long periods but are guaranteed and completely tax-free.
• The Rs 1.5 lakh annual limit is shared with other Section 80C investments under the old tax regime.