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.