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
10 mins read
Choosing Investments
This article compares the various ways of investing in PPF to show which gives the most interest.
📚 Topics covered:
- What is the public provident fund?
- How is interest calculated for PPF?
- Case 1: ₹1.5 lakhs invested by 5th April
- Case 2: ₹12,500 invested monthly by the 5th
- Should you invest ₹1.5 lakhs 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 ₹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.
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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: ₹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
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 by 5th April?
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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