PPF or Public Provident Fund is one of the most popular investment options in India that also provides tax benefits. Few more reasons for its popularity even to this day is that the interest earned on PPF as well as the final maturity amount is fully tax-free. And as of now, there aren’t many savings instruments that have tax-free maturity status in India.
But when it comes to PPF, many investors still aren’t sure about how interest on PPF balance is calculated?
And since they don’t know this, they tend to ask questions like “What is the best time to invest in PPF to get maximum interest” OR “Should I invest in PPF in a lump sum or monthly?” OR “What is the best way to invest in PPF?”
These are natural questions to have when one wants to see their money grow as much as possible.
But I think that once you understand the exact PPF interest calculation method, you will be in a better position to answer the above questions yourself. And later on, I will tell you whether trying to maximize returns from PPF actually matters or not.
So let’s move on…
Since last few years, the interest rates of Public Provident Fund or PPF (and many other small savings instruments) are notified on a quarterly basis. You can check the PPF interest rate history; for the latest quarter, the PPF interest rate is fixed at 7.1%.
How is PPF interest calculated?
According to the latest PPF rules, the interest on PPF balance calculated on a monthly basis but it is credited to your PPF account at the end of the financial year, i.e. on 31st March in one go.
This means that even though interest calculation happens monthly, the PPF account is compounded annually and interest accrued gets credited at the end of the financial year.
The next question you may have is:
How is PPF interest calculated on a monthly basis?
The PPF Interest is calculated on the minimum balance in PPF account between 5th and the end of each month.
So this basically means that if you invest in PPF before the 5th of a month, then in addition to previous month’s balance, you will also interest on the current month’s investment. But if you deposit after 5th, then you will get the interest only on the previous month’s balance.
Let’s take two simple examples:
PPF investing BEFORE 5th of Month
- Suppose the PPF interest rate applicable is 8%.
- Your PPF account balance on 31st July is Rs 3 lac.
- You deposit Rs 50,000 on 2nd You PPF account balance now is Rs 3.5 lac.
- Between 5th and 31st August, the minimum balance in your PPF account was Rs 3.5 lac.
- So your monthly interest calculation on PPF account will be on Rs 3.5 lac. That is (8%/12 * Rs 3.5 lac) = Rs 2333
PPF investing AFTER 5th of Month
- PPF rate applicable is the same as above at 8%.
- Your PPF account balance on 31st July is Rs 3 lac.
- You deposit Rs 50,000 on 10th
- You PPF account balance between 5th and 10th August was Rs 3 lac.
- You PPF account balance between 10th and 31st August was Rs 3.5 lac.
- So between 5th and 31st August, the minimum balance in your PPF account was Rs 3.0 lac (and not Rs 3.5 lac)
- So your monthly interest calculation on PPF account will be on Rs 3.0 lac. That is (8%/12 * Rs 3.0 lac) = Rs 2000
So as a PPF subscriber, you wish to maximize interest earnings, you should deposit your PPF contributions before the 5th of each month.
How to earn maximum interest from PPF account?
I know this sounds pretty cliché but the maths of PPF interest maximization is pretty simple.
How can you do it?
- The ideal option is to invest Rs 1.5 lac in your PPF account (maximum permissible PPF investment limit per year) between 1st and 5th of April, i.e. at the start of the financial year itself. So you should deposit the amount on/before 5th of April every year. This one-time PPF deposit in the first few days of the financial year will help you earn interest for the whole year.
- But not everyone has Rs 1.5 lac to spare and invest at the start of a year? So for them and those who deposit some amount every month in PPF, they can try to deposit on/before 5th of that month. This will help earn interest (on that month’s deposit amount) for that month too.
But just remember one thing that if you wish to make deposits in PPF multiple times a year, then you can make any number of contributions as long as the sum total of all the contributions is Rs 1.5 lac. Earlier (before 2020), there was a limit of making deposits in a PPF account of a maximum of 12 times per year.
Another thing to remember is that you cannot make contributions over Rs 1.5 lac in PPF in a financial year. Because as per the latest PPF rules, the maximum permissible limit for PPF is Rs 1.5 lac per year. If you do deposit above the limit, then you wouldn’t earn any interest on the excess amount.
But let me be frank here. Many people give too much importance to this whole debate of PPF Investing Before 5th Vs. After 5th of the month. I think it is not that important. True that it helps you earn extra interest. But if you do the maths, the overall difference between the two isn’t much (when compared to accumulated PPF corpus) even after the full tenure of PPF in 15 years.
So if you can invest Rs 1.5 lac before 5th April every year, then good for you. Or if you can’t invest in one go but can invest in PPF before 5th of every month, then good for you too. But if you can’t do either, then all isn’t lost.
I think more important is to find the right investment instrument which is suitable for the financial goal and allows you to have proper asset allocation.
Many people look at PPF as a retirement savings product.
But let me remind you that PPF alone will not be enough to save for retirement. You will (unless you are an ultra-conservative investor) be better served by SIP in Equity Funds. The Public Provident Fund or your PPF account can certainly be part of the overall portfolio in line with your chosen asset allocation.
Hopefully, now you would have a clear idea about how interest on PPF account is calculated.
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