PPF: Before 5th Vs After 5th of Month? Or Before 5th April?

  • Should you invest before the 5th of every month in PPF account?
  • Should you invest Rs 1.5 lac before 5th April every year for maximum returns from your PPF account balance?

The answer to these questions is Yes no doubt.

But people focus unnecessarily on these small things. And for many, it’s symbolic of their financial savviness that they are able to invest before 5th of every month in PPF.

I am sure many of you know this. But for those who don’t, let me highlight this. If you read the detailed How PPF Interest is calculated, then you will know that the PPF interest is calculated every month on the lowest balance between the 5th and the last date of each month.

As an example, let’s say that

  • On 30th June, your PPF account balance is Rs 5 lac.
  • Now if you make a fresh deposit of Rs 1 lac on 3rd July, then as per the rules, it will check the lowest PPF account balance between 5th July and 31st July. In this case, it will be Rs 5 lac + Rs 1 lac = Rs 6 lac. So you will earn interest for the month on Rs 6 lac.
  • On the other hand, if you invest Rs 1 lac on 8th July, then the minimum balance in the account would be Rs 5 lac between 5th and 7th July. It is only on/after 8th July that the balance increases to Rs 6 lac due to your investment. So as per rule, the lowest balance between 5th and last day would be Rs 5 lac. And that is on which interest will be calculated.

So it is for this reason that it is said that if you have to invest anything in PPF, do it before the 5th of that month so that you get the interest on your fresh investment for that month as well. On the other hand, if you don’t, then you will only get the interest from the next month onwards.

Many people take this a step further.

They wish to use and deposit the full Rs 1.5 lac contribution (upper limit) before 5 April to get the interest on the entire amount for the entire year.

There is nothing wrong with this. But if you do some basic maths, you will realize that over a period of 15-year PPF tenure, the difference in the final PPF maturity amount in either case (investing before 5th Vs after 5th) is very small. So it’s just an unnecessary detail in my view.

I am not saying you shouldn’t do it. I am just saying that it hardly matters.

So you will regularly read/hear statements like invest in PPF on or before the 5th of the month to enjoy maximum interest on your investment. Don’t bother about it. Its doesn’t matter much.

But remember one thing. Even though the interest on PPF account balance is calculated (and becomes due) every month, it gets credited only at the end of the financial year.

And there is another important thing to understand.

Many people just rush to invest full Rs 1.5 lac in their PPF account at the start of the financial year. But it is important to invest in accordance with your asset allocation and not just for the heck of it. PPF with 15-year lock-in is best suited for retirement savings. And when you are saving for 15+ years, you should be more in equity if you want to get inflation-beating returns on your investments.

So if you are young and investing Rs 2 lac a year for retirement and out of that Rs 1.5 lac is going to PPF, then you are doing it wrong unless you are an ultra-conservative investor. And saving with proper asset allocation can result in you taking the risk of running out of money in retirement.

No doubt you are doing great by saving. But you are not doing it correctly. You need to follow the simple yet powerful Goal-based Investing philosophy and then invest. How much you invest and n which investment option should be driven by factors like time horizon, risk appetite and suitability of the product.

Remember, proper asset allocation is the key to achieving your financial goals and this can be strategized by doing Goal-based financial planning exercise.

So now when you hear things like Why you should invest before the 5th of every month in PPF account, you should not pay much heed to them.

Note – I have already written several posts related to PPF. If you are interested, then you can refer to the below links:

1 comment

  1. Thanks for the detailed analysis of PPF investment.

    However, I am not convinced with your reply with regard to investing before 5th. Almost equated investing before 5th and after 5th. . The responsibility of financial adviser is to find various various ways to optimise the returns even if it is some miniscule improvement.

    Having identified the benefit of investing before 5th, I am of the view, you should not have dwell upon it again and giving more or less contrary /confusing view.

    If there is no use of investing before 5th, you should not have touched the subject at all if you are not convinced. However, I am in favour of investing before 5th. I felt wasted my time after reading the conclusion of the article with regard investing before 5th and after 5th.

    with regards
    Madhavan

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