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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
13 mins read
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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?

This article is a part of our detailed article series on Public Provident Fund (PPF). Ensure you have read the other parts here:

📚 Topics covered:

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 ₹500/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 don’t 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.

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Case 1: ₹1.5 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     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 ₹40.68 lakhs

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Case 2: ₹12,500 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     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 ₹39.45 lakhs

Should you invest ₹1.5 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 ₹1.5 lakhs/year and investing ₹12,500/month is only ₹40.68 lakhs minus ₹39.45 lakhs or just ₹1.23 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 ₹1.5 lakhs in PPF by 5th April. Instead, invest no more than ₹12,500 and invest the rest in risky assets like equity as per your long-term goals like retirement and children’s education.

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This post titled How to get the most interest when investing in PPF? first appeared on 05 Apr 2023 at https://arthgyaan.com


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