The finance minister increased the maximum investment ceiling in PPF (Public Provident Fund) from Rs 1 Lakh to Rs 1.5 Lakhs per financial year in the last budget. This makes the already popular PPF more attractive. The PPF is one of the very few investment avenues which still enjoys the EEE benefit – the investment is exempt from tax and eligible for tax rebate, the interest is tax free, and the maturity amount too is tax free.
The most obvious benefit is that one gets to invest Rs 50,000/- more per year in the name of each family member who is 18 years and above, save tax and also save a higher corpus for the long term. But there is another important aspect which most people are not aware of or ignore. When is the investment done in the year. If one times his or her yearly investment properly, it could change the maturity amount significantly. Let us understand how –
PPF interest, which is currently 8.7 % p.a , is calculated on the minimum balance in the account between the 6th of the month till the end of the month. Which means that if you deposit any amount in the account on or before the 5th of the month, it earns interest for that month. But majority of the investors invest in the last quarter of the year, between January to March , just when it is time to show the proof of investment to their employer for rebate U/S 80 C.
A simple calculation shows us that –
Rs 1,50,000/- invested on or before April 5 earns an extra interest of Rs 13,050/- for the whole year at the current interest rate of 8.7% p.a, compared to the same amount being deposited between 6-31 March of the financial year.
One may argue that it is not possible for everyone to deposit a lumpsum of Rs 1.5 Lakhs at the beginning of the year. Even for those who want to invest this amount systematically every month, say Rs 15,000/- per month in 10 installments, timing the payment on or before the 5th of the month would mean an extra interest of Rs. 1305 for the whole year.
The effect of compounding in the first case-
If someone were to open a PPF a/c and deposit Rs 1,50,000/- every year on or before 5th April, the maturity amount, (assuming current annual rate of interest) after the 15 year term* would be –
If the same amount of Rs. 1,50,000/- were to be deposited at the end of each financial year after 5th March till 31st March, the maturity amount on completion of the 15 year term would be –
The difference is more than 4 lakhs, which is 8-9 % of the maturity corpus!
*PPF term is 15 years from the end of the financial year in which the account was opened.