Why Invest Rs 1.5 lakh in PPF before 5th April?

In India, many PPF account holders have a habit of depositing full Rs 1.5 lakh in PPF between 1st and 5th April to maximize the interest benefit for their PPF accounts.

However, many investors do not know how PPF interest is calculated and why it might make mathematical sense to deposit full Rs 1.5 lakh in PPF before 5th April in a given financial year. That is of course if you have Rs 1.5 lakh surplus to invest in and if it suits your goal’s asset allocation.

So let’s see why investing Rs 1.5 lakh in PPF before 5^th April helps maximize interest and returns on the PPF account balance.

The interest on the PPF balance is calculated on a monthly basis but it is credited to the PPF account only once at the end of the financial year (i.e. after 31st March). And the interest is calculated on the minimum balance in the PPF account between the fifth (5th) and the end of each month. So if it’s a 30-day month, then the minimum balance between the 5th and 30th of the month will be used. If it’s a 31-day month, then the minimum balance between the 5th and 30th of the month will be used. And if it’s February, then the minimum balanced between the 5th and 28th of February will be used to calculate the interest for the month.

So if you invest after the 5th of a month, then you only get interest on the previous month’s balance. But if you invest on or before the 5th of the month, then you will get interest on the current month’s balance apart from the previous month’s balance as well. That is the difference between investing before 5^th vs after 5^th of month in PPF account.

It’s clear that investing before the 5th of the month is beneficial. Now extend this logic further. If you need to invest Rs 1.5 lakh in PPF every year, for reasons of tax-saving of investing, then the ideal option would be to invest Rs 1.5 lakh between 1 April and 5 April at the start of the financial year itself.

The PPF accounts follow an April-to-March financial year. So to earn the maximum interest, you may deposit the full Rs 1.5 lakh amount up to the Section 80C limit on/before the 5th of April every year. This lumpsum PPF one-time deposit will earn interest for the whole year.

So that’s your correct answer to the question ‘When to invest in PPF to get higher returns?’

Let’s take an example to understand this.

Suppose you have an existing PPF account with a balance of Rs 5 lakh on 31^st March 2021. Now you want to deposit the entire Rs 1.5 lakh in PPF for the next financial year in one go. Let’s now see what happens when you deposit it before 5^th April 2021 and what happens if you deposit it after 5^th April 2021.

The current PPF interest rate is 7.1% (check latest PPF rates).

Scenario 1: Investing Rs 1.5 lakh before 5^th April in PPF

• PPF Balance (31^st Mar 2021) – Rs 5 lakh
• New contribution for new financial year done on – 2^nd April 2021.
• New contribution amount – Rs 1.5 lakh
• New PPF balance (2^nd April 2021) – Rs 6.5 lakh
• Minimum Balance between 5^th and 30^th April – Rs 6.5 lakh
• Monthly Interest – 7.1%/12
• Monthly interest on Minimum Balance between 5^th and 30^th April – (7.1%/12) * Rs 6.5 lakh = Rs 3845.8

Scenario 2: Investing Rs 1.5 lakh after 5^th April in PPF

• PPF Balance (31^st Mar 2021) – Rs 5 lakh
• PPF Balance (5^th April 2021) – Rs 5 lakh
• New contribution for new financial year done on – 7^th April 2021.
• New contribution amount – Rs 1.5 lakh
• New PPF balance (7^th April 2021) – Rs 6.5 lakh
• Minimum Balance between 5^th and 30^th April – Rs 5 lakh (remember that Rs 6.5 lakh balance came into being only after 7^th So from 5th to 6th April, the balance was Rs 5 lakh only. So as per rule, the lowest balance between the 5th and last day would be Rs 5 lac. And that is on which interest will be calculated).
• Monthly Interest – 7.1%/12
• Monthly interest on Minimum Balance between 5^th and 30^th April – (7.1%/12) * Rs 5 lakh = Rs 2958.3

I know the difference may not seem much at first, but remember that PPF maturity is 15 years. So due to compounding over the long-term, you may end up with a little less money at the end of the 15-year tenure.

So as a rule of thumb, if you are planning to invest a lump sum in your PPF account, then try to do it before April 5 to get the maximum amount of interest for your PPF deposits. If you can’t do it in a lump sum, even then it’s fine. If you plan to do it in monthly investments, then try to deposit the money in your PPF account before the 5th of every month. Plain and simple.

But does it really matter in the long run?

Trying to maximize your gains is fine. there is nothing wrong with this approach, to be honest. But if you do some basic maths, you will realize that over a period of 15-year PPF tenure, the final amount in either case (investing before 5th April Vs after 5th April) is very small. So it’s just an unnecessary complexity in my view. But that is my view. To each his own.

I am not saying you shouldn’t do it. I am just saying that it hardly matters if you get other investments in your portfolio right.

Just investing Rs 1.5 lakh in PPF won’t solve your life problems. Nor will having random goals like getting Rs 1 crore from PPF. When it comes to your personal finances, you need to save for various goals like children’s education, retirement, house purchase and what not. And you really need to get a hang of investing in the right investment for the right goal. need to follow Goal-based Investing philosophy and only then begin to invest. How much you invest and n which investment option should be driven by factors like time horizon, risk appetite and suitability of product.

Remember, proper asset allocation and investing the right amount regularly are far more important in achieving your financial goals. And no one will ask you whether you invested before or after 5th April if you are unable to save enough for your goals. Right?

So I would say that when you hear things like Invest before 5th April in PPF to maximize gains, then don’t take it to heart. Focus on getting bigger things right in your financial lives and try to have a proper plan that you can invest in with confidence. That is all that matters I can guarantee you that.

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

• PPF Interest Rate History
• PPF Maturity Calculator (Excel)
• How to become a PPF Crorepati?
• VPF Vs. PPF
• PPF Maturity Options (After 15 years)
• PPF Withdrawal Options (Before 15 years)
• PPF Vs. NPS
• ELSS Vs. PPF
• How Interest on PPF Account is Calculated?

I hope you found this discussion about investing Rs 1.5 Lakh between April 1st to April 5th to maximize interest benefits of PPF useful.