How to get the most interest when investing in PPF?
This article compares the various ways of investing in PPF to show which gives the most interest.
How to get the most interest when investing in PPF?
Posted on 05 Apr 2023
Author: Sayan Sircar
Tags: 
Choosing Investments
13 mins read
Choosing Investments
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This article compares the various ways of investing in PPF to show which gives the most interest.
This article is a part of our detailed article series on Public Provident Fund (PPF). Ensure you have read the other parts here:
-
How much money has been made by investing in the Public Provident Fund (PPF)?
This article shows the maturity amount of investing in the Public Provident Fund (PPF) for 15 years as per historical interest rates.
-
Which is the best month to invest in PPF to get the highest interest?
This article explains how PPF interest calculation works so that you can invest in the best month to get the maximum interest.
-
SENSEX vs PPF report card 2023: should you invest 1.5 lakhs in PPF in April?
This article compares how the PPF has performed against the SENSEX since 1979 to help investors decide if they should invest a lump sum in PPF in April 2023.
-
What is the latest PPF rate? What are the historical rates for PPF?
This article gives you the current and historical interest rates for PPF so that you can decide if investing in PPF is the right option for your portfolio.
-
When does a PPF account mature?
This article shows you a quick way to know when your PPF account will mature depending on the date you opened the account.
-
Frequently asked questions on Public Provident fund (PPF): the complete guide
This article compiles an exhaustive list of FAQs on the Public Provident fund (PPF).
-
PPF vs. mutual funds: which is better?
The article presents a historical analysis of investing in stocks vs. PPF since 1979.
-
Should you renew your PPF account or invest in mutual funds?
A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.
š Topics covered:
- What is the public provident fund?
- How is interest calculated for PPF?
- Case 1: ā¹1.5 lakhs invested by 5th April
- Case 2: ā¹12,500 invested monthly by the 5th
- Should you invest ā¹1.5 lakhs in PPF by 5th April?
What is the public provident fund?
As per Wikipedia, the Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India introduced by the National Savings Institute of the Ministry of Finance in 1968. PPF allows you to save small sums of money, and offers a guaranteed interest rate and tax benefits that make it attractive for many conservative investors.
PPF is a fantastic debt instrument that has guaranteed return (though it has fallen over time) but it is still higher than the market rate in other options. Since there is a 15 years lock-in (which can be extended in blocks of 5 years) and to keep the account active you need only ā¹500/year, open it and keep it active. Later when you need to invest more amount in long-term debt investments, both the maturity of PPF will be closer and you will have many options like debt mutual funds. You can open PPF in your own name plus in the name of your parents if they donāt have one already. When you get married and have children, you repeat this for your spouse and children.
PPF is an EEE-class instrument which means that it is exempt from tax on investment up to 1.5 lakhs/year under 80C, exempt from taxation during growth and there is a full exemption on taxes at maturity.
How is interest calculated for PPF?
The Ministry of Finance declares PPF rates every quarter. That interest rate is used to calculate the applicable interest every month based on the balance which is the minimum of that between the 5th to the end of every month. This the reason you should invest before 5th of the current month instead of after. The interest is credited on 31st March. If you have 10000 in the account on 5th May, and the rate of interest is 7%, then the new balance is 10000 * (1+7%/12) = 10058 as calculated after 31st May. If you invest 1000 on 15th May and nothing else after that then this new 1000 is not considered in the May balance but will be included in the June balance. If the rate changes to 7.1% on 1st Jul (after Q2 end), then from 5th Jul onwards, 7.1% is the rate used to calculate the new interest. The total interest thus calculated is credited on 31st Mar next year.
Since the amount of interest you get depends
- on the date of investment. If you are investing before 5th of the month, you get more interest than compared to investing after the 5th
- the earlier you invest, the more interest you get
Based on this observation, we will compare two ways of investing in PPF to understand how the investment works.
Case 1: ā¹1.5 lakhs invested by 5th April
Yearly interest when you invest once a year
| Month | Deposit | Lowest balance | Monthly interest |
|---|---|---|---|
| Apr | 1,50,000 | 1,50,000 | 887.50 |
| May | 0 | 1,50,000 | 887.50 |
| Jun | 0 | 1,50,000 | 887.50 |
| Jul | 0 | 1,50,000 | 887.50 |
| Aug | 0 | 1,50,000 | 887.50 |
| Sep | 0 | 1,50,000 | 887.50 |
| Oct | 0 | 1,50,000 | 887.50 |
| Nov | 0 | 1,50,000 | 887.50 |
| Dec | 0 | 1,50,000 | 887.50 |
| Jan | 0 | 1,50,000 | 887.50 |
| Feb | 0 | 1,50,000 | 887.50 |
| Mar | 0 | 1,50,000 | 887.50 |
| Total interest | Ā | Ā | 10,650.00 |
PPF account balance when you invest once a year
| Year | Deposit | Start Balance | Interest | End balance |
|---|---|---|---|---|
| 1 | 1,50,000 | 0 | 10,650 | 1,60,650 |
| 2 | 1,50,000 | 3,10,650 | 22,056 | 3,32,706 |
| 3 | 1,50,000 | 4,82,706 | 34,272 | 5,16,978 |
| 4 | 1,50,000 | 6,66,978 | 47,355 | 7,14,334 |
| 5 | 1,50,000 | 8,64,334 | 61,368 | 9,25,701 |
| 6 | 1,50,000 | 10,75,701 | 76,375 | 11,52,076 |
| 7 | 1,50,000 | 13,02,076 | 92,447 | 13,94,524 |
| 8 | 1,50,000 | 15,44,524 | 1,09,661 | 16,54,185 |
| 9 | 1,50,000 | 18,04,185 | 1,28,097 | 19,32,282 |
| 10 | 1,50,000 | 20,82,282 | 1,47,842 | 22,30,124 |
| 11 | 1,50,000 | 23,80,124 | 1,68,989 | 25,49,113 |
| 12 | 1,50,000 | 26,99,113 | 1,91,637 | 28,90,750 |
| 13 | 1,50,000 | 30,40,750 | 2,15,893 | 32,56,643 |
| 14 | 1,50,000 | 34,06,643 | 2,41,872 | 36,48,515 |
| 15 | 1,50,000 | 37,98,515 | 2,69,695 | 40,68,209 |
Maturity amount is ā¹40.68 lakhs
Case 2: ā¹12,500 invested monthly by the 5th
Yearly interest when you invest once a month
| Month | Deposit | Lowest balance | Monthly interest |
|---|---|---|---|
| Apr | 12,500 | 12,500 | 73.96 |
| May | 12,500 | 25,000 | 147.92 |
| Jun | 12,500 | 37,500 | 221.88 |
| Jul | 12,500 | 50,000 | 295.83 |
| Aug | 12,500 | 62,500 | 369.79 |
| Sep | 12,500 | 75,000 | 443.75 |
| Oct | 12,500 | 87,500 | 517.71 |
| Nov | 12,500 | 1,00,000 | 591.67 |
| Dec | 12,500 | 1,12,500 | 665.63 |
| Jan | 12,500 | 1,25,000 | 739.58 |
| Feb | 12,500 | 1,37,500 | 813.54 |
| Mar | 12,500 | 1,50,000 | 887.50 |
| Total interest | Ā | Ā | 5,768.75 |
PPF account balance when you invest once a month
| Year | Deposit | Start Balance | Interest | End balance |
|---|---|---|---|---|
| 1 | 1,50,000 | 0 | 5,769 | 1,55,769 |
| 2 | 1,50,000 | 1,55,769 | 16,828 | 3,22,597 |
| 3 | 1,50,000 | 4,72,597 | 28,673 | 5,01,270 |
| 4 | 1,50,000 | 6,51,270 | 41,359 | 6,92,629 |
| 5 | 1,50,000 | 8,42,629 | 54,945 | 8,97,575 |
| 6 | 1,50,000 | 10,47,575 | 69,497 | 11,17,071 |
| 7 | 1,50,000 | 12,67,071 | 85,081 | 13,52,152 |
| 8 | 1,50,000 | 15,02,152 | 1,01,772 | 16,03,923 |
| 9 | 1,50,000 | 17,53,923 | 1,19,647 | 18,73,571 |
| 10 | 1,50,000 | 20,23,571 | 1,38,792 | 21,62,363 |
| 11 | 1,50,000 | 23,12,363 | 1,59,297 | 24,71,660 |
| 12 | 1,50,000 | 26,21,660 | 1,81,257 | 28,02,916 |
| 13 | 1,50,000 | 29,52,916 | 2,04,776 | 31,57,692 |
| 14 | 1,50,000 | 33,07,692 | 2,29,965 | 35,37,657 |
| 15 | 1,50,000 | 36,87,657 | 2,56,942 | 39,44,599 |
Maturity amount is ā¹39.45 lakhs
Should you invest ā¹1.5 lakhs in PPF by 5th April?
If you follow the discussion above, the best month is therefore at the beginning of the financial year. Therefore April is the best month to invest in PPF since that will always give the highest interest.
Related:
Which is the best month to invest in PPF to get the highest interest?
As the calculation above shows, the earlier you invest, the more interest you get. Since the PPF investment window opens on the 1st of April and interest calculation starts on the balance of 5th onwards, then an investment before the 5th April gets the maximum interest. This is the mathematical part.
However, over a 15-year period, the difference between investing ā¹1.5 lakhs/year and investing ā¹12,500/month is only ā¹40.68 lakhs minus ā¹39.45 lakhs or just ā¹1.23 lakhs. You, therefore, make very little less money by breaking the investment equally over 12 months.
We have already shown that PPF has not beaten risky assets like equity in less than 10% of cases since 1979: The latest result of PPF vs. SENSEX.
Therefore, you are significantly hurting your portfolio by investing ā¹1.5 lakhs in PPF by 5th April. Instead, invest no more than ā¹12,500 and invest the rest in risky assets like equity as per your long-term goals like retirement and childrenās education.
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