Investing in the Public Provident Fund (PPF) in the new financial year can save an investor from taxes and also earn an interest of 7.1 percent. It is one of the safest investment options that provide guaranteed returns. However, it is best to deposit money in the PPF account before April 5 to reap the maximum gains. Those who plan to invest in instalments should also do it before the fifth of every month.

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How is the interest calculated?

According to the PPF rules, interest on deposits in PPF account is calculated on the minimum balance between the close of the fifth day and at the end of the month. Therefore, deposits made in the PPF account before the fifth earn interest for the whole month. Although interest on the PPF balance is calculated every month, it is credited to the account of the investor at the end of the financial year.

Also read: Multiple PPF accounts won’t be merged; check details here

Even for monthly deposits, it is best to make the payments before the fifth of every month since interests are calculated from the fifth. This will give the investor the opportunity to maximise income.

Understanding it better

For example, if the investor deposits a lump sum of Rs 1.5 lakh in the PPF account before April 5, it will fetch 7.1 percent per annum interest for the quarter between April and June. For the month of April, interest will be calculated on the minimum balance between April 5 and April 30, which is Rs 1.5 lakh in this case. The interest is calculated as: 1,50,000 * 7.1 percent/12 = Rs 887.50.

The amount is divided by 12 as interest is calculated on a monthly basis. Therefore, the investor will earn interest of Rs 887 for the month of April. The same amount will be deposited for the rest of the months in the quarter as interest rates are unlikely to change in three months.

Also read: Tax saving investments: 10 options to help you duck despair during filing season

If the amount was deposited after April 5, the investor would not have earned the interest for the month of April.

Amounts to a lot in the long run

Although the amount is not much, it will have a huge impact on the deposits as the PPF account has a lock-in period of 15 years. As a result of compounding over the long term, the investor may lose a lot of money.

Also read: Best ways to save taxes: Investments and insurance

Hence, financial advisors ask investors to make deposits in the PPF account before April 5. For those investing through cheques, deposits should be made in such a manner that the investment is cleared before the fifth of the month.

Under the PPF, investors can deposit a minimum of Rs 500 and maximum of Rs 1.5 lakh in a financial year. They can enjoy tax benefits under Section 80C of the Income Tax Act. The interest earned on PPF deposits is also tax-free.

(Edited by : Shoma Bhattacharjee)

First Published:Apr 1, 2022 7:58 PM IST