Interest sense and sensibility

The new fiscal year is just here. It’s the best time to put money in tax-saving investments. Being an early bird in instruments such as the Public Provident Fund (PPF) will earn you interest for a longer period. But unless you invest the money in the PPF on or before the 5th of the month, you won’t earn interest on the invested amount for that month. That’s because of an outdated rule according to which interest on the PPF is calculated on the minimum balance in the account between the 5th day of the month and the last day of the month.

Say, you put money in the PPF on April 6 you will not get any interest for April on the money. Worse, since the money moves out of your bank account into your PPF account, you lose out on interest on the bank account too. The rule is similar for the Sukanya Samriddhi Yojana — here, you need to deposit the money on or before the 10th of the month to be eligible for interest for the month. The no-payment of interest in such cases of missed deadlines not only affects that year’s income but has a cascading effect in future years too, since these are cumulative investments.

It makes little sense to have such arbitrary deadlines in an age when interest calculations are computerised and automated. Why is it not possible to calculate interest on the PPF and Sukanya Samriddhi Yojana from the date of investment? When interest on savings accounts is being calculated on the basis of daily outstanding balance, surely the same rule can be applied in the case of other investments and deposits too. That would be fair and equitable for investors.

This may need a push from the powers-that-be. Until April 2010, interest on savings accounts also used to be calculated in an arbitrary manner — based on the minimum balance between the 10th and the last day of the month. But the RBI sensibly changed the rule. It is high time, good sense spreads.