Public Provident Fund or PPF, a retirement-focused investment instrument, comes with EEE (Exempt-Exempt-Exempt) tax status. The maturity amount and the overall interest earned during the period of investment are tax-free. While it is considered a decent investment venue for customers, one should be mindful of the timing of their investments to maximize their returns.

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As per PPF rule, investors should always deposit their installments before or on the fifth of every month. This helps them in gaining interest benefit for that month.

The interest rate offered on PPF accounts - currently 7.1 percent - is calculated on the minimum balance in the account between the fifth day of the month and the last day of the month.

(Also read: PPF vs NPS: Find out which scheme suits you better)

“The interest on the amount deposited is calculated on a monthly basis in PPF, but the interest is credited into the account at the end of the financial year, that is on March 31 of every year. The interest becomes payable for that month if the deposit is made before the fifth of that month. One can get maximum amount of interest on interest if the amount is deposited before 5th,” suggests Nitin Shahi, Executive Director- Findoc.

Somebody, who does it after fifth day of the month, may lose out on substantial interest income for that particular month.

(Also read: Invest Rs 5,000 per month in PPF, get over Rs 17 lakh on maturity; here's how)

Rahul Agarwal, Director Wealth Discovery/EZ Wealth explains this with an example.

“Let’s assume an PPF account had a balance of Rs 1 lakh on April 5, 2020 and if investor make an additional deposit of Rs 1.5 lakh on April 6, 2020 then as per rules the interest will be accrued on the minimum balance in the account between April 5 and April 30, 2020 which in this case would be Rs 1 lakh,” he says.

This means investor will lose out on the interest on Rs 1.5 lakh for the month of April 2020.

(Also read: Here's how much you should invest in PPF to earn Rs 1 crore)

“In this example if the deposit was made on or before the April 5, 2020 the interest would have accrued on the entire amount that is Rs 2.5 lakh,” he explains.

This means investors who are making lump sum investment for a financial year in PPF should do it on or before April 5 of the financial year. Investors who are making regular installments should make it a rule to invest on or 5th of every month.

"It should be remembered that although the amount of interest foregone due to delayed investment appears small but the interest on the same amount if compounded over a long period of time could make a significant difference to one’s overall return," opines Agarwal.

(Disclaimer:

CNBCTV18.com advises users to check with certified experts before taking any investment decisions.)

First Published:Jun 25, 2020 7:37 PM IST