Investment in the public provident fund (PPF) remains prevalent among the majority of individual investors seeking not only to garner a superior interest rate through small savings schemes but also to avail tax-saving benefits.
At present, PPF investments yield a 7.1 percent annual return with a maximum investment cap of ₹1.5 lakh.
It’s imperative to note that interest accrual transpires on a monthly basis, predicated on the minimum balance between the 5th and the final day of each month. While interest accrues monthly, it is disbursed to the account holder at the conclusion of the fiscal year.
Consequently, investors may opt to maximize their returns by initiating investments on or before the 5th of each month.
Preeti Zende, Founder of Apna Dhan Financial Services, underscores this point, stating, “Interest is calculated based on the minimum balance between the 5th and the last day of the month. Thus, the optimal time to invest a lump sum is before the 5th of the month. However, exercise caution not to invest the maximum amount indiscriminately. Assess your asset allocation and invest accordingly.”
Investment on the 5th of the Month
Illustrating this concept further, consider the following scenario: Suppose you possess ₹50,000 in your PPF account. In Scenario I, you inject an additional ₹1 lakh into your PPF account on the 5th of the month, whereas in Scenario II, this injection occurs on the 10th of the month.
Scenario I:
In the first scenario, during interest calculation, the principal amount considered will be the minimum between the balance on the 5th and the final day of the month, totaling ₹1.5 lakh (50,000 + 1,00,000). Consequently, the interest accrued amounts to ₹887.50 (1,50,000 X 7.10/100 X 1/12).
Scenario II:
Contrarily, in the second scenario, the principal amount considered will be the lower of the two, i.e., ₹50,000. Thus, the interest accrued will be ₹295.8 (50,000 X 1/12 X 7.10/100). Therefore, despite both scenarios featuring ₹1.5 lakh in the PPF account, the interest earned varies significantly based on the investment date.
Investing ₹1.5 Lakh in April
What if you opt to invest the maximum permissible amount in the initial month? This action would further augment your earnings. Let’s delve into this concept further. The maximum annual investment limit stands at ₹1.50 lakh, equivalent to approximately ₹12,500 per month.
By investing monthly, your earnings witness incremental growth commensurate with the additional inflow of investment. Conversely, by investing the maximum amount in a lump sum during the inaugural month, you accrue interest on ₹1.5 lakh for the entire year.
Hence, it’s advisable to invest the entire ₹1.5 lakh in your PPF account on or before April 5.
For those grappling with the intricacies of PPF, here’s a summary of key points to bear in mind:
I. PPF offers monthly interest accrual, resulting in 12 interest calculations annually rather than a single calculation per fiscal year.
II. Investing before the 5th of the month is recommended due to interest computation being based on the lowest balance between the 5th and the final day of the month.
III. Investing on or after the 6th of the month results in forfeiting interest for that particular month.
IV. As interest accrues monthly, maximizing interest entails doing so for each of the 12 months, commencing in April.
V. The investment ceiling stands at ₹1.5 lakh, thus investing before April 5 facilitates earning the maximum interest.
VI. Investors have the flexibility to opt for various investment frequencies: monthly, quarterly, semi-annually, or annually.
