Debt Avenues have been the most popular investment choice in India because of the safety of principal amount and assured fixed returns.
Although the returns are fixed, it is very important to understand how and on what balance the interest is calculated. Also, whether it is compounded interest or simple interest and when the interest is credited to your account. Here is a summary.
Employees Provident Fund(EPF):
The rate of interest is fixed by the Central Government in consultation with the Central Board of trustees, Employees’ Provident Fund every year during March/April. The rate of interest for the year 2017-18 has been notified as 8.55%.
The interest is credited to the members account on the monthly running balance with effect from the last day in each year. The interest earned each year is added to the EPF balance and earns interest in subsequent years at the notified rate.
Public Provident Fund(PPF):
The interest is paid as per the rates declared by the Government from time to time. The current rate of return on the PPF account is 7.6%, compounded annually.
Interest is calculated for a calendar month on the lowest balance in the account between the close of the fifth and the last day of the month. However, it is credited to the account only at the end of each year.
Ensure that deposits into the PPF account are made by the 5th of a month in order to earn interest for that month.
Senior Citizen Savings Scheme(SCSS):
Amount deposited in a Senior Citizen Savings account earns a simple interest of 9% per annum and is PAID OUT to the investor at the end of each quarter(March 31, June 30, September 30 and December 31). Interest not claimed at the end of any quarter does not earn any additional interest.
Having the quarterly interest transferred to a regular savings accounts enables you to earn interest on the unutilized amount in the savings account.
Post Office Monthly Income Scheme(PO MIS):
Amount deposited in the PO MIS account earns a simple interest of 7.7% per annum is PAID OUT to the investor at the end of each month. Interest not withdrawn does not earn any interest.
Here again, having the monthly interest transferred to a regular savings accounts enables you to earn interest on the unutilized amount in the savings account.
Post Office Time Deposit:
A PO Time Deposit earns a simple interest each year based on the tenure of the deposit which is paid out to the investor at the end of each year. If the deposit is not withdrawn on maturity, it will earn a simple rate of interest paid on Savings account (only 3.50%) and that too for a maximum period of two years post maturity.
Savings Bank Account:
A Savings Bank account earns a return of 3.5% per annum based on the daily weighted average balance. Some banks pay the interest monthly while most banks pay the interest quarterly.
Generally, the interest credited to the account is taken as correct with hardly any investors verifying the amounts received. With most of operations going computerized, the scope of error is less.
But, it will good to do a test check once in a while to satisfy oneself about the mathematical accuracy. Specially in case of instruments like EPF and PPF accounts which still follow a manual cum computerized system.
Also, in case of some of the Schemes, the interest paid out does not earn any interest if it is not collected at the time of payout. Same thing applies if the principal is not collected on maturity. This should be kept in mind to avoid losing out on returns.