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As the new financial year begins, you may be planning on some investments for 2019-20. If you are a conservative investor or new to savings instruments, you can choose PPF (public provident fund) which enjoys the EEE (exempt-exempt-exempt) tax status and comes with a government guarantee on your deposits. It is secure and tax exemption can be claimed at the time of deposit as well as maturity.
The interest rate on PPF for the April to June 2019 was kept unchanged at 8 percent. This interest rate is revised for every quarter based on the yields on government securities.
Despite the attractive interest rate, if you want to make the most of it, you need to make deposits towards the scheme cleverly.
How can you make the most of the interest earned on PPF?
The interest on PPF deposits are calculated every month but is credited to the account only at the end of the financial year that is on 31 March.
Most importantly, the interest is calculated on the minimum balance every month between the fifth and the end of the month. This means that the interest for the month will only be payable when made before the fifth of that month.
Example:
In the example, let us assume the interest rate remains at 8 percent throughout the FY 2019-20.
Note:
- Interest for a particular month will be calculated as (Minimum balance x 8%)/ 12
- The interest earned is compounded (added to the deposits) or credit only at the end of the financial year.
| Month | Deposit (in Rs) | Minimum balance when deposited before 5th (in Rs) | Interest earned for the month (in Rs) | Minimum balance when deposited after 5th (in Rs) | Interest earned for the month (in Rs) |
|---|---|---|---|---|---|
| April | 10,000 | 10,000 | 66.67 | 0 | 0 |
| May | 10,000 | 20,000 | 133.33 | 10,000 | 66.67 |
| June | 10,000 | 30,000 | 200.00 | 20,000 | 133.33 |
| July | 10,000 | 40,000 | 266.67 | 30,000 | 200.00 |
| August | 10,000 | 50,000 | 333.33 | 40,000 | 266.67 |
| September | 10,000 | 60,000 | 400.00 | 50,000 | 333.33 |
| October | 10,000 | 70,000 | 466.67 | 60,000 | 400.00 |
| November | 10,000 | 80,000 | 533.33 | 70,000 | 466.67 |
| December | 10,000 | 90,000 | 600.00 | 80,000 | 533.33 |
| January | 10,000 | 100,000 | 666.67 | 90,000 | 600.00 |
| February | 10,000 | 110,000 | 733.33 | 100,000 | 666.67 |
| March | 10,000 | 120,000 | 800.00 | 110,000 | 733.33 |
| Total | 120,000 | Total | 5,200.00 | Total | 4,400.00 |
How much do you stand to lose?
In the above example, one can stand to lose Rs 800 in interest a year just by failing to make the deposit before the fifth of every month.
Similarly, if you were to make a lump sum deposit of Rs 1,20,000, make the deposit before 5 April of the financial year so as to not lose one month's interest which will come up to Rs 800 (at 8 percent).
Other important points to note about PPF deposits
- One cannot make more than 12 deposits in a financial year.
- The contributions can be made anytime, need not be a sequence of monthly or quarterly deposits.
- A minimum deposit of Rs 500 needs to be made per annum to keep the account active.
- Deposits per annum can exceed Rs 1.5 lakh but interest will not be earned on any deposits made over Rs 1.5 lakh in a year.
- It is a long term investment instrument that stretches to 15 years (maturity period).
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