How a small change in date can impact interest income
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If you are grappling with low interest rates on fixed income products, you may want to do every little bit to enhance your interest income. For that, it is important to understand how interest income is calculated.
The date on which deposits and withdrawals are made in a month can have an impact on the interest income you earn. Here we talk about the interest calculation for a few fixed income instruments – Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Post Office Savings Account (POSA) and Employees’ Provident Fund (EPF).
Post Office Schemes
PPF and SSY are two long-term saving products from the Post Office offering attractive interest rates today.
Both the accounts require minimum amount to be deposited every financial year (₹500 for PPF and ₹250 for SSY) to keep them active.
Under these accounts, the interest amount gets credited at the end of the financial year and compounding of interest happens annually. However, the interest is calculated for each calendar month on the lowest balance in an account between the close of the fifth day and the end of the month.
Say, the balance in your PPF/SSY account as on July 2021 end is ₹2 lakh and you plan to deposit ₹10,000 in August. If the deposit is made on August 6, the interest for the month of August will be calculated on ₹2 lakh only. The deposit amount of ₹10,000 will be considered for interest calculation only from the month of September 2021. If you slightly tweak the deposit date to some time before August 5, you can earn a slightly higher interest income on PPF/SSY. This may translate to a reasonably good amount over time due to the compounding effect.
The Post Office Savings Account (POSA) too comes with similar conditions. The interest, here too, is credited at the end of each financial year, but the lowest balance between the tenth and the last day of the month is considered.
Rules for POSA also state that on withdrawal of the entire balance interest on the corpus will be calculated up to the last day of the month preceding the month in which the account is closed. Thus, one can plan the withdrawals from POSA at the beginning of a month as you would have maximised the interest earnings at the end of the previous month.
Employees’ Provident Fund
If you are a salaried , both the employee and the employer together contribute 24 per cent of the basic salary plus dearness allowance on a monthly basis towards EPF.
On all the contributions made, interest is calculated from the first day of the month (succeeding the month of credit) to the end of that fiscal year.
For example, if, say, the EPF contribution for April 2021 is made by your employer to the EPFO towards the end of the April itself, then this contribution will earn interest for eleven months in the fiscal FY22 (May 2021 to March 2022). But say, the employer deposits the amount in the beginning of May 2021, then interest will be calculated only for ten months, that is, from June 2021 to March 2022.
Though credits to the PF account are not in your control, understand that your employer transferring the monthly PF contribution at the end of that relevant month is beneficial over transfer at the beginning of the next month.
On the other hand, in case of withdrawals, interest is calculated on the withdrawn amount up to the last day of the month preceding the month of withdrawal.
On maturity
You can consider continuing your investments in fixed-income products such as PPF/SSY and EPF account even after the contributions come to an end. This is because the interest rates offered by EPF (8.5 per cent for FY20), PPF (7.1 per cent now) and SSY (7.6 per cent now) have so far been attractive compared to other products considering the risk-return metrics.
When the subscriber retires after 55, interest will continue to be credited to the PF account until three years from the time fresh contribution to the account are stopped. Even when the EPF account becomes dormant (with no fresh contributions) before retirement age of 55, the account continues to be operative and interest will be paid until the subscriber turns 58, in most cases. In case of PPF/SSY, the account holder may retain his account after the minimum contributory period of 15 years, without making any further deposits upto 21 years from account opening in case of SSY or any period in blocks of five year in case of PPF and the balance in the account will continue to earn interest at the rate applicable to the scheme.
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