Individuals making an investment in Public Provident Fund (PPF) accounts for the current financial year, 2024-25, must ensure that their money is credited into the account before April 5. This is because investment made before this date can get PPF account holders higher interest earnings.
According to the PPF scheme, the interest in the PPF account is calculated based on the lowest balance in the PPF account between the 5th of every month and at the end of month. So if PPF investors are making a lumpsum payment for the financial year, it must be done before April 5 to maximise the earnings. This becomes crucial for people who make a single annual bulk deposit, as any delay will result in the loss of an entire month’s interest on the annual deposit.
For those making monthly payments to their PPF accounts, monthly contributions must be done on or before the 5th of every month to ensure there is no loss of interest.
Here is an example to understand this. Suppose a PPF account holder deposits money in the PPF account on April 15. According to the PPF account rules, the lowest balance between April 5 and April 30 will be considered for monthly interest calculation. As the lowest balance will be what was in the account before the April 15 deposit, that balance will be used for interest calculation. The deposit made on April 15 will earn no interest for the month of April.
On the other hand, let us say the deposit in PPF account is made on or before April 5. The lowest balance will be considered after taking the deposit of April 5 into account. Due to this, the contribution made on April 5 will earn interest for the month of April.
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How a small delay in PPF deposit can cost you lakhs
The PPF deposit made before April 5 or the 5th of every month earns more interest than PFF deposits made after that date. A question then arises how much more interest will a PPF account earn if the deposits are made before the specified date. Remember that the interest in a PPF account is calculated on a monthly basis but credited at the end of the financial year. Further, the interest for the PPF account is reviewed every three months by the government.
Here is an example to understand this. Currently, PPF offers 7.1% interest rate per annum for the April-June 2024 quarter. Assuming this is the interest rate that remains throughout the PPF account duration of 15 years. An individual will earn an interest of Rs 18.18 lakh by making deposits of Rs 1.5 lakh each year on or before April 5 for the next 15 years. On the other hand, if the PPF account holder makes a deposit after April 5, he will earn interest of Rs 15.84 lakh. Hence by investing a lumpsum amount after April 5, a PPF account holder loses Rs 2.69 lakh in the 15-year period.
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A PPF account holder making monthly payments of Rs 12,500 on or before 5th of every month will earn a total interest of Rs 16.94 lakh in the 15-year period. However, if the PPF deposits are made after the 5th of every month, then Rs 16.70 lakh will be earned as interest. Here, the interest loss is Rs 24,005 only, lower than what is lost when a lumpsum payment is made on or before April 5.
Remember, the interest earned from PPF account is exempted from tax. Hence, by missing out on making deposits before April 5 or 5th of every month, PPF account holders lose out on a chance to earn more tax-exempt interest. An individual can make a maximum PPF investment of Rs 1.5 lakh in a financial year.
