Taking a right step is wise, and doing it at the right time is even wiser. It’s advisable to invest in your public provident fund (PPF) account up to ₹1.5 lakh, however, it is even better if you do this before April 5.
PPF offers a tax-free return of 7.1 percent per annum. When compared with the government-backed fixed security schemes, only EPF (Employees Provident Fund) and SSY (Sukanya Samridhi Yojana) offer higher tax-free returns than this. The former offers 8.1 percent, whereas the latter gives 7.6 percent per annum.
However, investors must keep in mind that in the PPF, they must invest the money at the right time to optimise their returns.
How is interest calculated on PPF
On the PPF, interest is calculated on the lowest balance between the 5th and the end of each month.
So, if you contribute after the 5th, contribution of that month will not accrue interest as it will be calculated only from the next month.
“According to the guidelines of PPF, the interest on PPF is calculated based on the minimum PPF balance from the 5th of the month to the month end. If you invest in the PPF account between 1st to 5th of any month, you will be able to get the accrued interest in the account balance for that month too. This is the reason why investing from 1st to 5th of the month in PPF is preferred by most investors,” says Harshad Chetanwala Co-Founder of MywealthGrowth.com.
So, there are no prizes for guessing that financial advisors tend to advice their clients to invest early in the year so that investments fetch higher returns during the entire year.
“I always tell my clients to invest as early as possible. And if you want to earn interest for the entire year, you can invest in the month of April and that too before April 5,” says Deepak Aggarwal, chartered accountant and financial advisor based in Delhi.
Let us suppose, the balance in one PPF account is ₹10 lakh as on 31 March, 2022. The investor invests ₹1.5 lakh on April 4 which is the maximum permitted limit.
As a result, total PPF balance inflates to ₹11.5 lakh on April 5. On April 30, the balance again stands at ₹11.5 lakh. For the purpose of calculating interest for the month of April, the minimum of balance on April 5 and April 30 is considered, i.e., ₹11.5 lakh in this case.
At the rate of 7.1 percent, the return on ₹11.5 lakh will become ₹6,804. On the other hand, if you decide to deposit ₹1.5 lakh on April 6, the lowest of balance on April 5 and April 30 will be ₹10 lakh. Interest at the rate of 7.1 percent will be ₹5,916.
Depositing contribution before April 5
|Balance on April 1||₹10,00,000|
|Contribution between April 1-5||₹1.5 lakh|
|Total balance on April 5||₹11.5 lakh|
|Interest for the month of April||₹6,804|
|Contribution after April 5||₹1.5 lakh|
|Total balance on April 5||₹10,00,000|
|Interest for the month of April||₹5,916|
|Difference in interest||₹888|
So, merely by delaying the deposit for a couple of days, you stand to lose out on interest or ₹6,804-5,916 = ₹888. Although the difference is not significant, it can make considerable difference in the long run because of the power of compounding.