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.
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:
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 2024.
This article shows the maturity amount of investing in the Public Provident Fund (PPF) for 15 years as per historical interest rates.
This article explains how PPF interest calculation works so that you can invest in the best month to get the maximum interest.
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.
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.
This article shows you a quick way to know when your PPF account will mature depending on the date you opened the account.
This article compiles an exhaustive list of FAQs on the Public Provident fund (PPF).
The article presents a historical analysis of investing in stocks vs. PPF since 1979.
A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.
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.
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
Based on this observation, we will compare two ways of investing in PPF to understand how the investment works.
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 |
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
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 |
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
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