How the pre-tax return on Public Provident Fund (PPF) works out to 10.14%? Explained

Public Provident Fund (PPF) is known for its exceptional tax benefits. The scheme allows you to earn tax-free interest and a maturity amount.

Moreover, PPF is backed by a sovereign guarantee. While these features are not common among investment products, there is one more benefit of the scheme that is not usually talked about.

Although the official interest rate of PPF is only 7.1%, it goes higher when taking tax into consideration. If you have to pay 30% tax, you would need a nominal return of 10.14% from an investment for a post-tax return of 7.1%. PPF gives this by default. Even at 25%, 20%, and 15% tax rates, the pre-tax returns from PPF are better than most bank deposits at present.

How is pre-tax return calculated?

The formula to calculate the pre-tax return is as follows:

In the case of PPF, the post-tax return is 7.1%. Therefore, the pre-tax return at a 30% tax rate will be = 7.1%/(1-30%) = 10.14%

• At a 25% tax rate, the pre-tax return from PPF will be = 7.1%/(1-25%) = 9.4%

• At 20% tax rate, the pre-tax return from PPF will be = 7.1%/(1-20%) =8.8%

• At 15% tax rate, the pre-tax return from PPF will be = 7.1%/(1-15%) =8.3%

• At 10% tax rate, the pre-tax return from PPF will be = 7.1%/(1-25%) = 7.8%

How is PPF interest compared to FD returns?

Currently, most of the top banks are offering up to 7% or less returns on fixed deposits. The following table shows the highest interest offered by some of the top banks in the country as of June 12, 2025.

Source: Respective bank websites; data as of June 12, 2025.

The above interest rates are pre-tax, and they are around 3% less than the pre-tax return from PPF at a 30% tax rate.

The returns from a fixed deposit are taxed at individual tax slabs. So if you earn 7% interest from FD and pay 30% tax on returns, your effective post-tax return is only 4.9%.