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Why you should invest before the 5th of every month in PPF account

C.S. Sudheer     May 10, 2018

The Public Provident Fund popularly called PPF is a favourite investment for many Indians. The reason for this? The Principal and Interest you earn on the PPF, is guaranteed by the Government of India. This means come what may, the money invested is safe and you earn interest on it.

PPF continues to remain a great investment even after decades, simply because the returns earned are tax-free. Sadly, interest offered on PPF has been coming down in recent years.

Interest offered on PPF was 8.8% for FY 2012-13. The interest is 7.6% for April-June 2018. In spite of the cut in interest rates, PPF continues to be a great investment.

1. What are PPF accounts and why are they beneficial?

PPF was introduced in India, way back in 1968, to mobilize small savings. It was promoted as a savings-cum-tax saving investment. Any Indian citizen can invest in the PPF, while NRIs and HUFs are not eligible to make the investment.

PPF has a compulsory 15 year lock-in. The tenure can be extended in blocks of 5 years. You can open the PPF account at a designated post office or a Nationalized Bank.

The minimum investment that can be made in a year is just Rs 500, with the maximum being Rs 1.5 Lakhs for each financial year. You can appoint a nominee for the PPF account. You can have only one PPF account, unless the second account is in the name of a minor.

Take a look at some of the benefits:

  • Investment in PPF is risk free: PPF is backed by the Government of India and gives guaranteed risk-free returns and the capital is protected.
  • PPF enjoys EEE benefit: The Principal invested in PPF enjoys a tax deduction under Section 80C, up to a maximum of Rs 1.5 lakhs a year. Interest earned and money withdrawn at maturity are tax-free.

2. Invest in PPF before the 5th of the month or after?

It's a great idea to deposit your installments in the PPF, before or on the 5th of each month. PPF currently offers an interest of 7.6% on the minimum balance in your account, between the fifth day of the month and the last day of the month.

This is how it works. Let's say at the beginning of the month, you have Rs 12,000 in the PPF account. You have deposited another Rs 7,000 in this account on the 7th day of the month.

You will enjoy interest on Rs 12,000 and not on Rs 19,000 as the minimum balance in your PPF account between the 5th day and the last day of the month is Rs 12,000.

So, invest in PPF on or before the 5th of the month, to enjoy maximum interest on your investment. If you deposit the installments after the 5th of the month, you will lose out on a lot of interest income for that particular month.

3. Why is investing in PPF before the 5th of the month beneficial in the long run?

Let's understand why you need to deposit the PPF installments before the 5th of each month.

You invest the maximum amount of Rs 1.5 Lakhs a year in the PPF. Let's assume an interest of 8.7% across the tenure of the PPF.

If you take a look at this table, you will see that the final maturity value of the PPF at the end of the 15-year term is Rs 45,04,384. This is only if you make all PPF deposit installments before the 5th of each month.
What happens if you make the PPF deposit installments after the 5th of each month? Well, you get the final maturity value of the PPF at the end of the 15-year term as Rs 44,73,197. This is a saving of Rs 31,187.

If you invested in the PPF before the 5th of each month, you would have gained about 2.5 times the monthly investment, compared to a person who always invested after the 5th of the month.

The saving might not seem too great, but it sure can help with household expenses even considering the time value of money. Be wise, get rich.

Written by C.S. Sudheer, CEO and Founder,

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