PPF or public provident fund is one of the oldest and probably the most famous investment schemes backed by the government. Ever since it’s inception in 1968, PPF has constantly gained popularity. Even today, if you (a Gen-Z) would seek investment guidance from your parents and grandparents, PPF will definitely pop up in that conversation. The best part of PPF is that unlike many schemes available in the market, it is not overengineered and is fairly simple to understand. But are there any nuances that may help us maximize our returns? Well, there actually are. Let’s understand the basics and how to earn maximum interest on PPF?
How is Interest Calculated on PPF account?
For proceeding further, it is important to understand how interest is calculated on PPF. While investing, one should keep the following pointers in mind:
- There is no fixed rate of interest on PPF currently. It is reviewed every quarter on the basis of yield from government bonds. So, rate of interest may vary each quarter for your account. For Q4 FY 21 i.e. quarter from Jan-21 to March-21, this rate has been finalized at 7.1%.
- Interest on all investments is compounded annually for all investments.
- However, a noteworthy point here is that this interest is calculated on a monthly basis and is credited to your account on March 31st each year.
How to Earn Maximum Interest on PPF investment?
Now that we are aware of how interest on PPF is calculated, let’s understand the hacks which can help you maximize the returns:
1. Cutoff Date:
The cutoff date for calculation of monthly interest is 5th of each month. This means that if you make a contribution to your PPF account after 5th of a particular month, you tend to lose interest of that month on your latest contribution. Let us understand this with example:
Say you have a balance of Rs. 1,00,000 in your PPF account for last FY and you plan to invest a lumpsum amount of Rs. 50,000 after you have got the bonus. Table below shows the difference in interest earned when the contribution is made before 5th of April vis-à-vis after 5th.
As evident from the table above, you can earn up to 3% more by just keeping this small hack in mind. The same effect is even more evident when it comes to monthly contributions in PPF account.
Say you invest Rs. 5,000 each month in your PPF account, the impact of taking care of cut-off date is evident in the table below. You tend to lose about 15% in case you don’t pay attention to the cutoff dates.
2. Go Lumpsum and Go Early:
Second way to earn maximum interest on PPF account would be to start early in the year with a decent lumpsum amount instead of investing every month. This is of course subject to one’s comfort levels. But, as per numbers, investing a big chunk in April (say), would earn an interest the entire year. On the other hand, investing in tranches will definitely yield a lower return.
3. Go Digital:
In my experience, the biggest road block for an investment is going to the bank and physically filling out the form. So, once you open your PPF account, make sure it has the facility of online transfer of funds to the account. This way, it is much easier to maintain the financial discipline.
4. Be Consistent:
Just like every other investment, PPF demands a certain degree of financial discipline. Minimum investment in PPF per year stands at Rs. 500, however you should aim to hit the upper limit at 1,50,000. Whichever way you plan to invest (lumpsum or every month), make sure you continue to do that each year to realize the magic of compounding.
PPF is a EEE (exempt, exempt, exempt) instrument. This means that whatever you invest in PPF
(A) Can be claimed for deductions in 80C while tax filing,
(B) Income from interest on PPF is tax free and
(C) Withdrawal of amount from PPF account is also tax neutral.
With so many merits I think PPF is a superb instrument to park your money. Make sure you follow the steps above to ensure that you maximize earnings on your hard earned money.
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Until next time. . .