public provident fund

A PPF Calculator

by Vinaya HS on October 30, 2016

in Finance

The following post is a sponsored post.

PPF calculator refers to the simple calculator that determines interest earned on your investment in PPF account. The basic idea behind PFF calculator is compounding the interest on your investment. Although, you can exercise this method manually when you have to calculate interest for one year. But when it comes down to fifteen or ten years, the calculations can be messier but no need to worry simple PPF calculators can help you do all the calculations. Before we go to details of PPF calculator, Let’s understand more about PPF account, its features and benefits

What Is Public Provident Fund Account?

In simple words, Public Provident Fund is the saving scheme that helps individuals to build the retirement corpus and also save taxes. With this scheme, you can invest your savings for fixed period and will earn the periodic interest (compounded annually). Currently, the PPF interest rate is 8.1%! That is reasonable!

PPF account can be opened with a low and affordable amount of deposit. The second attraction to this scheme is the tax benefits. The interest earned is completely tax-free. And, this scheme is backed by the government, so comes with security. No doubt, why PPF is so popular in India!

PPF is easily accessible. You will face no problem while registering for the account. To open a new account, you have to visit the authorized bank or post office. Simply, get the form, fill it and submit with required documents. PPF accounts can be opened in all PSU banks and some select private banks.

Why Should You Choose PPF Scheme?

Some people don’t opt for PPF scheme because they don’t know its awesome features and benefits. For your convenience, I have outlined some of them as follows:

Interest Rate: The Indian Government set the interest rate for PPF periodically Currently the review period is quarter. You earn interest on investment which is compounded annually. Current interest rate is 8.1%, which is pretty good.

Tenure: To avail the benefits of PPF, you need to keep the account active for fifteen years. It means you need to invest in this account per year for fifteen years. After maturity, you can invest for further five years.

Initial Deposit: You can open the account with Rs. 100.

Minimum/Maximum Annual Deposit: To keep the account active, you have to make a deposit every year. The minimum amount is Rs. 500 and the maximum are Rs. 1.5 lacs per years. You can make deposits with a cheque, cash, PO, online funds transfer and DD, etc.

Withdrawals: Withdrawal is allowed after maturity. Well, premature withdrawal can be made, but on certain conditions and after seven years from opening date. Otherwise, premature withdrawal is not possible!

Tax Advantages: The tax rebate is the main attraction of PPF. The interest earned is completely tax-free

How To Calculate The Interest Using PPF Calculator?

Calculation of PPF interest is not difficult. So what is the exact algorithm of PPF calculator? As mentioned in the start, the interest will be compounded annually. For instance, you have made the initial investment of Rs. 1.5 lac. So, you will calculate the interest on Rs. 1.5 lacs at the rate of 8.1%. Pretty easy right! Now, we have to compound it. Next year, you will make an investment of Rs. 1.5 lacs again. Now, the rate will be applied to the sum of previous year’s balance including interest earned and current year’s balance. And this process will be continued for fifteen years. You can use a simple calculator below to calculate interest and yearly balance for PPF calculator.

Author: Sarabdeep Singh; Co-founder bodhik.com, an online financial advisor.

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To date, I haven’t understood why some — actually many — financial experts advise you to not save-up your money in a Public Provident Fund account. Thankfully, I’m not in that camp of thought. I have always encouraged you to save the maximum allowed limit (currently Rs 100,000) each year in your PPF account. In fact, I wrote this post as soon as I came home having made my annual deposit into my PPF account. Let me tell you that I was very happy when I saw the interest credited for the past financial year (though not as happy as I could have been).

Let’s make some simple calculations –

Let’s suppose that you’ve managed to save-up a total of Rs 500,000 in your PPF account over a period of 10-years. In the 11th year, at the current rate of interest, you’d get Rs 44,000 (!) purely as interest earned. In the 12th year, you’d get nearly Rs 48,000 (!!) purely as interest earned. In the 13th, you’d get nearly Rs 52,000 (!!!) purely as interest earned. This continues to only increase according to the laws of compounding.

Seriously, what’s not there to like about that? Don’t forget that the amount that you put-in, the interest that you earn, and the amount that you withdraw are all income-tax free. There’s no need for you to worry about whether the capital markets are headed-up or headed-down or headed-nowhere. What more should the PPF account offer to convince the financial experts? (Hint: With equity there’s something to write about each day and get you to take action/change course but with the provident fund there isn’t.)

But here’s a previous post with an extremely healthy debate in the comments section where readers suggest various other options including the Employees Provident Fund and SIPs in Mutual Funds. I encourage you to read that article in its entirety.

As I’ve commented over there, it’s not an either this one or that one decision. In fact, I’m currently invested in all three forms. Just that I’m a lot peeved when someone says that the Public Provident Fund isn’t a worthy option and especially when that advise is geared towards a younger audience. Suppose you start at 23, by the time you’re in your early 30s, you’d be making a cool Rs 50,000+ per year (per the example above) simply in interest alone. And if you managed to save-up a whole lot more, you’d be making an even cooler amount as interest earned.

Seriously, don’t listen to those financial experts! Show them what an expert you are!!

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For the first six-years of my professional career, I think I paid credit-card bills in the five-figures each year! I bought huge quantities of stuff that I simply threw away later. If instead, over these early six-years, I had saved Rs 70,000 each year in the Public Provident Fund (PPF) account that my mother had opened in my name –

  • I would have been richer today by close to Rs 700,000 (even if I had just deposited the minimum Rs 500 per year post the six-years)! Let’s translate that number into something real. 700,000 @ 9% rate of return = 63,000 per year or more than 5,000 per month in passive/interest income alone. My early retirement graph would have looked very very different.

Here’s how the situation would have looked today but actually looks today –

PPF_Graph_1

I’ve already lost the magical power of compounding and no matter how much money I put-in today I can never catch up with the “could have been here” line. Compounding works best when you save the maximum you can as early as you can.

And here’s how the situation would have looked vs. will actually look upon maturity of the account –

PPF_Graph_2

A 2x difference! Seriously! Nothing that I bought on those credit-cards was worth this loss.

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Reader Subrata writes-in:

My Public Provident Fund (PPF) account shall complete the original term of 15-years plus an extended term of 05-years in February, 2012. But I’d like to withdraw the balance only in September, 2013 to coincide with my retirement. Will my PPF account continue to earn interest in the interim period from February, 2012 to September, 2013? Please revert with actual clause numbers, etc. from the PPF Act.

My first response was to ask Subrata to check with the bank where he has his PPF account. To this, Subrata wrote back:

No one has so far given me a concrete answer. The bank staff who handle provident fund accounts don’t know even the basic rules pertaining to PPF. If one asks them a question other than the routine ones, their eyes look like those on a dead fish. I do remember reading somewhere that interest is given for the interim period but I’m not sure.

I then actually looked at some of my previous articles on the Public Provident Fund. The answer was right there in one of the comments. I wrote back to Subrata:

I think I have some good news. Here is a link to the PPF Act, 1968. On Page 3 it says (emphasis mine):

(3) Closure of account or continuation of account without deposits after maturity:- Notwithstanding the provisions of sub-paragraph (1), any time after the expiry of 15-years from the end of the year in which the initial subscription was made by him, a subscriber may, if he so desires, apply in Form C or as ‘near thereto as possible’ together with his pass book to the Accounts Office for the withdrawal of the entire balance standing to his credit and the Accounts Office, on receipt of such an application from the subscriber, shall subject to the provisions of sub-paragraph (4) allow the withdrawal of the entire balance (together with interest up to the last day of the month preceding the month in which the application for withdrawals made) after making adjustments, if any, in respect of any interest due from the subscriber on loans taken by him and close his account.

So, you will get the interest till the time you withdraw.

A happy reader who I’m sure will now give the bank staff an earful and a copy of the Public Provident Fund Act!

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I recently had the nomination on my Public Provident Fund (PPF) changed. The procedure is quite simple. (Note that the procedure that I described below is specific to State Bank of India because that’s where I have my PPF account but the procedure should be the same elsewhere too.)

  • First, ask the Bank or Post Office where you have your PPF account for a “Change of Nomination” form. The one issued by State Bank of India is shown below (click on the image for a full-size version).

Capital_Advisor_PPF_Nomination_Form

  • Fill-up the form, have it witnessed, and hand it over to the Bank or Post Office.

  • Have the new nomination details recorded in the passbook (State Bank of India now issues a printed passbook for PPF accounts as well). Don’t forget this step — you should have both the nomination registration number and the nominee (and guardian, if applicable) details recorded in the passbook.

That’s about it. Your new nomination is now in effect.

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I’d Be the First Person In the Queue For This

by Vinaya HS on June 10, 2011

in Finance

Wow!

I thought my eyes were deceiving me when I read this on Wednesday morning. Increase the cap on your annual Public Provident Fund (PPF) investments from Rs 70,000 to Rs 100,000?

I’d be the first person in the queue with a deposit form.

I’d still be the first person in the queue even if the interest rate wasn’t changed. Because, as I’ve said before, EEE @ 8% compounded is pure magic. And if this recommendation gets implemented, the magic only gets better.

If you have time on your side, start and contribute fully into a Public Provident Fund account. I can never get tired of saying this.

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The content for this post was provided by reader Ajay who proactively noticed a mistake in the interest credited into his Public Provident Fund (PPF) account, diligently followed-up the matter, and got it corrected. Each of us needs to keep a vigilant eye on our personal finances because no one cares about your money more than you do. Ajay’s experience is a timely reminder.

I checked the interest credited by the Post Office into my Public Provident Fund account for Financial Year 2009-2010 and found that it was less than what I had expected. The Post Office gave a weird reason for this discrepancy. They said that since I got my account transferred from one Post Office to another midway into the Financial Year, the computer calculated the interest for only half the year. They asked me to give them a written complaint and they corrected the mistake in about four weeks time.

I then searched on the Internet but did not find a PPF calculator that handled multiple deposits in a year and with different deposit amounts. After some research, I found that the Post Office uses the Interest Bearing Balance (IBB) method to calculate the interest.

There are some simple rules that we need to keep in mind when calculating the interest for PPF accounts:

  • Interest is calculated based on the Interest Bearing Balance method.

  • You have to deposit the amount on or before the 5th of a month.


Note: I have not done any withdrawals or taken loans on my PPF account. I am not sure how that gets calculated. For this example let’s just have deposits only and no withdrawals/loans.

The Interest Bearing Balance method is something that we learned in school and since we don’t apply it much for any manual calculations in day-to-day life this just remained in the textbooks!

The method is quite simple:

  • Find out the highest balance between the 1st and the 5th of a month. This will be the Interest Bearing Balance for that month.

  • Do the same for all the months in the year and add them up. Let’s call this result as Total IBB.

  • Use the formula Interest = Total IBB x 1/12 x Rate/100 where Rate is 8 (at present; may change in future).

That’s pretty much there is to it. I was working on a spreadsheet for this calculation, but put in the back seat due to other priorities.

Thanks Ajay for the valuable information. Let me see if I can cook-up a calculator.

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Yeah. You read that right. I contribute fully to my Public Provident Fund (PPF) account each year. And in the very first week of April.

Here’s why I do it?

  • The contribution, interest earned, and payout are Exempt, Exempt, and Exempt (EEE) from Income Tax — and I don’t foresee this changing despite all the hullabaloo. EEE @ 8% compounded is pure magic. When you don’t want to trade your time for money, your Public Provident Fund will be your pillar.

  • The [remaining] tenure is a perfect match for my goal for financial independence financial freedom (given my new insights). It didn’t start with this goal, but it will end with this goal. As I recently read, you should ask someone 10-years older than you for financial advise. I didn’t, but maybe you can take a leaf out of my book.

  • I’d seen my parents do this. Now I know why they did this. As a reader once commented, “there’s a lot to be learned from the fixed deposit generation.”

Here’s how I do it?

  • In the first week of each April, I withdraw the accumulated cash and make a deposit into my Public Provident Fund account. (When I switch to the Recurring Deposit mode of savings, the Recurring Deposit would automatically mature and convert to liquid cash in the beginning of each April. I’d get to pocket the additional interest earned.)

  • I don’t do this just for the sake of Section 80C.

That explains my approach to the Public Provident Fund.

What’s your approach?

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Tweets on 2010-09-29

by Vinaya HS on September 29, 2010

in Finance

A reader asks,

Recently, there was a hike in the EPF (Employee Provident fund) interest rate. Will this rate be applicable for the PPF (Public Provident Fund) too? Please publish this question on your blog as it would clarify facts for a lot of investors like myself.

The answer is NO — currently there is no link between the administered interest rates for the EPF and the PPF. That said, this article is perhaps the best analysis I’ve come across on the proposed hike.

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Ask the Readers: PPF and Retirement

by Vinaya HS on August 23, 2010

in Finance

Suppose you start at the age of 30. You save the maximum possible (currently, Rs 70,000) each year for the next 30 years. Then,

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I first read about this pension plan in the ET dated June 22, 2010. I was intrigued. Basically, Reliance Life Traditional Golden Years Plan is a regular premium retirement plan that provides guaranteed return, which is declared at the beginning of every financial year during the product term. So far so good. But,

The minimum guaranteed accumulation rate [in other words, the return] will not be less than the savings bank deposit interest rate, as declared by the Reserve Bank of India.

WTF, mate? What kind of guarantee is this?

Next, I ran the numbers through this calculator — assumptions were 35 years policy/premium paying term and a monthly premium of Rs 6,000. Over a period of 35 years, you pay a whopping 6% of your total premium as Premium Allocation Fees and Policy Administration Fees. To further add insult to your injury, you also pay around 1.2% of the accumulated value at the end of each year as Account Administration Fees.

A guaranteed tension plan in my opinion.

My advise:

Over a period of 35 years, you’d do FAR FAR FAR BETTER simply by saving the same Rs 6,000 each month in a Public Provident Fund account.

What do you think?

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N asks:

I want to save for my kid’s (an year and a half old at the moment) higher education — about fifteen years away. I can set aside Rs 10,000 each month. Where should I save or invest?

Here’s the investment strategy that I recommended:

  1. Rs 5,000 each month in a Public Provident Fund account.
  2. Rs 5,000 each month — through an SIP — in a diversified equity mutual fund. I’d pick the HDFC Top 200 Fund.

Assuming an 8% rate of return for both investments, you’d have a corpus of nearly 34 lacs at the end of fifteen years — sufficient enough to fund a decent higher education.

And, as I’ve written before, it’s prudent to think about the cash outflow of a financial instrument before you invest in it. For the options that I have recommended, it’s easy to stop/resume contributing depending upon your financial situation — you can even stop one and continue the other.

What do you think? Would you advise a different strategy?

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Tweets on 2010-05-26

by Vinaya HS on May 26, 2010

in Finance

Mithun asks,

I read your research on pension plans. But what exactly do you mean by “Save each month. Compound your savings in debt instruments…???”

Simple. Rather than paying an obscene premium for 30 years and making the life insurance company obscenely profitable while you receive a paltry pension, you can build a very decent corpus for yourself (and retire off the interest generated) by opening a Public Provident Fund account and saving the maximum possible each year (currently Rs 70,000) for 30 years.

What do you think?

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Tweets on 2009-01-22

by Vinaya HS on January 22, 2009

in Finance

I’ve been working on improving a few Excel-based calculators that I have previously published. Specifically, I have improved the following calculators:

Let me know how I can further improve these calculators. What other calculators do you wish to see? I’ve received many requests for a Home Loan EMI calculator; I will shortly publish one. You can also download a Personal Loan EMI calculator [instructions for usage].

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Tweets on 2008-03-05

by Vinaya HS on March 5, 2008

in Finance

Equity is the panacea for all problems.

We estimate the future cost of your daughters’ marriage in 15 years time to be Rs 96 lacs. Hence you need to start saving/investing now by handing over your money to a gamut of equity mutual funds.

This is a gist of the advice given by a popular personal finance magazine to one guy (with two daughters) while analyzing his financial state. Seriously. The same article also advised the guy to close his PPF account in order to send his parents on a pilgrimage. The estimated savings/investments per month to reach his goals were way beyond his monthly take-home income.

Poor guy. All he wanted was some good advise.

Note: I am republishing this post to test my blog’s sanity.

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If you haven’t already started on a long-term savings strategy, you could begin on one this April with a Public Provident Fund (PPF) subscription. I believe that the PPF was started by the Government of India in lieu of social security. (I doubt if a Government can ever provide social security to a billion plus people.)

Your money in the PPF account is perfectly safe, earns 8% (at the moment), qualifies for Section 80C of the Income Tax Act, and at the moment is EEE (Exempt Exempt Exempt – the money you invest, the interest earned, and the final withdrawable amount are all tax exempt). You can invest a low of 500 rupees and a high of 70,000 rupees a year (over a maximum of twelve installments per year). You are also allowed to withdraw money or take a loan; there’s a weird formula to compute the same, but I advise against doing so ever.

At the end of 15 years, you can either extend your subscription in blocks of 5 years or else close the account and reap the benefits. The PPF is a great way to set aside money for say your child’s higher education. You can open a PPF account at State Bank of India (SBI) or any of its subsidiaries or at the local post office. An individual is allowed to have only one PPF account.

Click here to download a PPF calculator.

The calculator above can be used for quick reference. The only input you need to enter (in cell B3 — highlighted in yellow) is the amount you are ready to put into your PPF account each month. The calculator gives you an idea of the maturity amount that you can expect over a 25-year period.

Let me know if you find this to be useful. If you already have a PPF account, what goals did you have in mind when starting one?

Update: September 25, 2008

Below is a continually updated list of PPF-related queries which are answered in leading financial magazines such as Outlook Money and Money Today.

From Money Today, September 18, 2008 — Page 30

Q: My wife wants to open a Public Provident Fund (PPF) account in her name and another in the name of our minor daughter. I do not have a PPF account. Who will be eligible for the deduction for the money deposited in our daughter’s PPF account — my wife or I?

A: One can open a PPF account in one’s own name or in the name of a minor as a guardian. However, you can have only one PPF account in your name. If you have two PPF accounts, one will be closed and you will be refunded only the principal, not the interest. Also, two adults cannot open a joint account, though an account-holder is free to appoint nominees. Since your wife is planning to open an account in her name, your daughter’s account will have to be under your guardianship. Therefore, you will be eligible to claim a deduction for contribution to that account. Your wife can claim a deduction for the contribution she makes to her own account. A PPF account can be opened even if you have an Employees’ Provident Fund account with your employer.

From Outlook Money, October 08, 2008 — Page 24

Q: I have a PPF account with SBI. I extended it for five years after the account’s first 15 years got over in 2006. The bank says that since I have withdrawn 60% of the balance as was in 2006, which is the maximum amount permitted to be withdrawn from an extended account, no withdrawal will be possible for the next two years. What are the rules regarding withdrawals from an extended PPF account?

A: Assuming that you have made new deposits during the extended period, the rules regarding withdrawals in an extended PPF account stipulate that only one partial withdrawal is allowed each year subject to the condition that the total of thw withdrawals during the 5-year extended period shall not exceed 60% of the balance as on the start of that period. The bank’s refusal is in accordance with this rule.

Q: As with various payments, is it possible to have standing instructions for transfer of funds from a savings account to a PPF account? If yes, then how can this be done?

A: Yes. It is possible to give standing instructions to the bank to transfer excess amount from your savings bank account to a PPF account, provided the two are with the same bank. You also need to keep track of the amount being transferred as PPF contributions in one financial year cannot exceed Rs 70,000.

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