How PPF Interest is Compounded

Public Provident Fund (PPF) interest is compounded annually on March 31st, but calculated on a monthly basis according to strict Ministry of Finance rules:

Monthly Interest = Lowest Balance between 5th and Month-end × (Annual Rate ÷ 12)
Annual Credit = Sum of 12 Monthly Interest Calculations (Credited March 31st)

The Golden 5th-of-the-Month Rule: To maximize your annual compounding, always deposit your PPF funds on or before the 5th of the month (or in a lump sum between April 1st and April 5th). If deposited on the 6th, that deposit earns zero interest for the remainder of that calendar month.

WORKED EXAMPLE • ₹1.5 LAKH ANNUAL DEPOSIT AT 7.1%

If you deposit the maximum statutory limit of ₹1,50,000 every year before April 5th across the 15-year statutory tenure:

• Total Capital Deposited: ₹1,50,000 × 15 years = ₹22,50,000

• Total Compound Interest Earned: ₹18,18,209

• Final Maturity Value: ₹22,50,000 + ₹18,18,209 = ₹40,68,209

• Tax Liability: ₹0 (100% Tax-Free under EEE)

Key Statutory PPF Rules & Regulations

  • Deposit Limits: Minimum ₹500 and maximum ₹1,50,000 per financial year across all active PPF accounts in an individual's name.
  • Loan Against PPF: Available from the 3rd financial year up to the 6th financial year (up to 25% of the balance at the end of the second preceding financial year).
  • Partial Withdrawals: Permitted from the 7th financial year onwards (up to 50% of the balance at the end of the 4th preceding year or the preceding year, whichever is lower).
  • Protection Against Attachment: PPF balances cannot be attached by any court decree or creditor claim under the Public Provident Fund Act, providing absolute asset protection.

Frequently Asked Questions

Can an NRI open a PPF account?

Non-Resident Indians (NRIs) cannot open a new PPF account. However, if an Indian resident opened an account before becoming an NRI, the account can remain active until its 15-year maturity on a non-repatriation basis, but cannot be extended further.

What happens if I miss the minimum deposit of ₹500 in a year?

If you fail to deposit at least ₹500 in a financial year, the account becomes discontinued. To reactivate it, you must pay a nominal default penalty of ₹50 per discontinued year along with the minimum ₹500 deposit for each missed year.

How many times can a PPF account be extended?

After the initial 15-year maturity, you can extend your PPF account indefinitely in consecutive blocks of 5 years. You must submit Form H within one year of maturity if you wish to continue making fresh annual deposits.