scorecardresearchWhy should you invest in your PPF account before the fifth day of a month?

Why should you invest in your PPF account before the fifth day of a month? An explainer

Updated: 05 Apr 2023, 01:57 PM IST
TL;DR.

By deferring investment after 5th of a month, investors tend to lose out on interest for that month. In PPF, interest is credited at the end of the year but is calculated on a monthly basis.

 Investing before the fifth of a month leads to a higher return

Investing before the fifth of a month leads to a higher return

If you are planning to invest in a public provident fund (PPF) account, then it is important to know when to make your investment. Those investors who don’t know how is interest calculated in the PPF must be aware of the fact that interest is credited every year but is calculated every month.

The monthly interest is calculated on the balance that is a lowest balance between the fifth of the month and the end of the month.

This means when PPF balance is 5 lakh on April 4, and an investor deposits one lakh on April 5, raising the total to 6 lakh —  the monthly interest at the rate of 7.1 percent will be calculated on 6 lakh assuming that nothing was withdrawn during the month from the account.

(6 lakh X 1/12 X 7.1/100) = 3,550.

On the other hand, if investor deposits one lakh, then the lowest of the balance between the fifth day and the end of the month would stand at 5 lakh.

As a result, the interest calculated would be as follows:

(5,00,000 X 1/12 X 7.1/100) = 2,958.

So, merely by depositing the sum a day later would cost the investor a loss of earnings to the tune of 592 (3,550 – 2,958).

It is vital to note that this is only for one month. As a result of the power of compounding, the loss of earnings would turn out to be considerable over a period of time.

Tax benefit

It is vital to note that PPF offers a deduction of up to 1,50,000 under section 80C of the Income Tax (I-T) Act, 1961.This exemption is applicable for citizens who opt for the old tax regime.

The new tax regime, which will now be a default regime from assessment year 2024-25 onwards, does not offer any tax exemption but tax rates are lower.

Even interest earned on the account and corpus received at the end of 15 years are also exempt from income tax.

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PPF offers an interest at the rate of 7.1 percent per annum

Some key details

It is vital to note that the minimum deposit in a public provident fund is 500 while the maximum sum one can invest is 1,50,000 in a financial year. One can seek loan from the third financial year and up to sixth financial year. Also, withdrawal is permissible every year from seventh financial year onwards.

The account matures on the completion of fifteen complete financial years from the end of the year in which the account was opened.

Upon maturity, account holder can retain the account indefinitely without any further deposit with the existing rate of interest.

 

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First Published: 05 Apr 2023, 01:57 PM IST