Investing in public provident fund (PPF) is common among most retail investors who want to not only earn a higher rate of interest by investing in small saving schemes but also save income tax.
Currently, investment in PPF instruments earns 7.1 per cent per annum and the maximum investment is ₹1.5 lakh.
Another key feature that one should keep in mind is that the interest is calculated on a monthly basis and is based on the lowest balance between the 5th and last date of every month. Although interest is calculated on a monthly basis, it is credited to the account holder’s account at the end of the financial year.
It’s because of this that investors may decide to maximise their earnings by investing on the 5th or before this date every month.
“The interest is computed on the lowest balance between the 5th and last days of the month. So the best time to invest a lump sum amount will be before the 5th of the month. But kindly ensure not to blindly invest the maximum amount. Check your asset allocation and invest accordingly," says Preeti Zende, Founder of Apna Dhan Financial Services.
The following example will help you understand this in detail. Let us say you have ₹50,000 in your PPF balance. And you are investing another ₹1 lakh in the PPF account on the 5th of a month in scenario I, and on the 10th of a month in scenario II.
In scenario one, at the time of calculating interest, the principal amount will be taken as the lowest of the amount on the 5th and the last date of the month, which will be ₹1.5 lakh (50,000 + 1,00,000). So, the interest earned becomes ₹887.50 (1,50,000X 7.10/100X1/12).
In scenario 2, the principal amount will be the lowest of the two amounts, which will be ₹50,000. So, the interest becomes ₹295.8 (50,000 X 1/12 X 7.10/100). So, while you have ₹1.5 lakh in the PPF account in both scenarios, the interest earned on your amount differs widely because of the date on which you decided to invest the money.
And what if you decide to invest the maximum deposit amount in the first month?
That will maximise the earnings even further. Let us understand more about this here. You can invest a maximum of ₹1.50 lakh in one financial year. This comes to around ₹12,500 a month.
When you invest every month, your earnings will be incremental based on the additional inflow of investment.
On the other hand, when you invest the maximum deposit amount in a lump sum in the first month itself, you will stand to earn interest for all 12 months on ₹1.5 lakh.
This is why it is advisable to invest the entire ₹1.5 lakh in your PPF on or before April 5.
So, if you still find it hard to grasp the details around PPF, we summarise them here for you.
I. PPF offers interest on a monthly basis; so interest is calculated 12 times rather than once in a financial year.
II. It is advisable to invest before the 5th of the month because the monthly interest is calculated on the lowest of amounts that stand on the 5th and last date of the month.
III. When you invest on the 6th of the month or later, you lose out on the interest that accrues for that month.
IV. Since interest is calculated on a monthly basis, the maximum interest can be earned when you earn the maximum interest for each of the 12 months starting in April.
V. The maximum investment limit is ₹1.5 lakh. So, it is recommended to invest before April 5 to earn the maximum interest.
VI. Investor has the option to invest in any of the given options of frequency: monthly, quarterly, half-yearly and yearly.