Public Provident Fund (PPF) has always been the first choice for Indian investors looking for a secure future and guaranteed returns. Better interest than bank FDs, government security and 100% tax free returns under EEE (Exempt-Exempt-Exempt) category make this scheme the most popular savings option. At present, the Central Government is paying interest on PPF at the rate of 7.1% per annum, which is calculated on compounding basis.
This question often arises in the minds of investors that which method of investment is best to get maximum returns: depositing regular installments every month or lump sum at the beginning of the financial year? Many times, due to lack of correct information, investors lose potential interest worth thousands of rupees every year.
The first key to earning maximum interest in Public Provident Fund lies in the way it is calculated. As per the rules, post offices or banks calculate interest on the minimum balance available between the end of the 5th of every month and the last day of the month.
If an investor deposits money after the 5th of the month, he does not get any interest for that current month. Calculation of interest on that deposited amount starts from the 5th of the next month. This simply means that if you are investing every month, your money should be credited to your account between 1st and 5th.
A minimum of ₹500 and a maximum of ₹1.5 lakh can be deposited in a PPF account during a financial year (April 1 to March 31). This maximum limit of ₹1.5 lakh can be deposited in two different ways.
The first way is to deposit ₹ 1,50,000 together for the entire year between April 1 and April 5. Another way is to invest in 12 monthly installments of ₹12,500 each between the 1st and 5th of every month. In both the situations, the total annual investment remains only ₹ 1.5 lakh, but there is a big difference in the returns received at maturity of 15 years.
| investment method | Monthly/Annual Investment | Total investment in 15 years | Total interest at 7.1% | Maturity fund after 15 years |
| Annual lump sum (April 1-5) | ₹1,50,000 (per year) | ₹22,50,000 | ₹18,18,209 | ₹40,68,209 |
| Monthly Installment (1-5th) | ₹12,50,0 (per month) | ₹22,50,000 | ₹16,94,845 | ₹39,44,845 |
Financial calculations clearly show that if you deposit a lump sum of ₹ 1.5 lakh before April 5 every year, you get interest at the rate of 7.1% on that entire amount for 12 months. Whereas in monthly investment, interest is added on your money in a phased manner. Because of this, in the entire tenure of 15 years, the lump sum investor will get approx. More than ₹1.23 lakh Net additional interest of Rs.
Although from a mathematical point of view an annual lump sum investment gives higher returns, but in practical life not everyone has a lump sum cash of ₹1.5 lakh available in the first week of April.
For the salaried class, it is more disciplined and easier to set an auto-debit of ₹12,500 every month or ₹5,000 to ₹10,000 as per your savings. If you choose monthly mode, just ensure that your Standing Instruction (SI) gets executed between 1st to 3rd of every month so as not to miss the cut-off of 5th.
For businessmen, freelancers or people who receive annual bonus in March or April, it makes the most sense to invest the lump sum before April 5.
Public Provident Fund is not just a 15-year plan, but it can become a major wealth creator for retirement. After completion of maturity of 15 years, the account holder can extend it in blocks of 5-5 years.
If you continue your PPF account without fresh investments after 15 years, you continue to get 7.1% tax-free interest on the entire balance. Whereas if you extend two blocks of 5 years each with contribution and invest ₹ 1.5 lakh annually for a total of 25 years, then your total fund becomes more than ₹ 1 crore (approximately ₹ 1.03 crore), of which more than ₹ 65 lakh is only the interest portion.