As the new financial year begins, many individuals must be wondering why they should invest in the Public Provident Fund (PPF), especially those who have opted for the new tax regime in FY 2025-26. The new tax regime has become more attractive than the old tax regime for a large number of taxpayers, as the new regime allows for zero tax payable on income of up to Rs 12 lakh. However, you must not forget that the interest income from PPF investments, as well as the maturity amount, are exempt from taxes. Your PPF investments should, therefore, continue at the maximum level permitted (Rs 1.5 lakh per FY), even if you opt for the new tax regime for FY 2025-26. This will help you earn tax-free interest while also keeping the PPF account active.To maximise the interest earned, ensure that the entire investment in PPF (allowed for the FY) is made as a lump sum investment in the PPF account on or before April 5. Similarly, in case you are investing on a monthly basis (and not lump sum) note that a contribution to a PPF account should be made on or before the 5th of every month. Depositing before this date will help you earn more interest on your PPF investments.
What PPF scheme rules say about interest calculation?
The interest on a PPF account balance is calculated on the lowest balance maintained in the account between the 5th of each month and the end of the month. Those contributing a lump sum to their PPF should ensure that the deposit is made before April 5 to have the amount counted in the interest calculations for the entire month of April.
Hence, missing the April 5 deadline could result in the loss of an entire month’s interest. This can have a significant impact on the overall return, especially at the time of maturity.
How much extra interest you will earn by depositing by April 5
To illustrate the importance of making deposits before April 5, consider the following example:
Scenario 1: If you deposit the money in your PPF account on April 15, interest for the month (April) will be calculated based on the lowest balance between April 5 and April 30. Since your balance before April 15 was lower, your deposit made on April 15 will not earn any interest for the month of April.
Scenario 2: If the deposit is made on or before April 5, it will be included in the balance considered for interest calculations, ensuring that the entire amount earns interest for the month of April.
How making timely PPF deposits earns you more interest on maturity
Making a timely PPF deposit either before or on April 5 for a lump sum investment can result in significant extra interest over time. Similarly, making monthly deposits on or before April 5 will result in significant extra interest at maturity.
Here are some examples to understand how much extra interest you can earn by making timely deposits:
Example 1: Lump sum PPF deposits
Suppose you make an annual deposit of Rs 1.5 lakh every year after April 5, say on April 15, with PPF deposits yielding an interest rate of 7.1% per annum which is the current interest rate. It is further assumed that this interest rate remains unchanged for the 15-year tenure of the PPF account. As a result of the lump sum deposit made on April 15, you will earn accrued interest amounting to Rs 20.92 lakh, leading to a total maturity amount of Rs 44.92 lakh.
However, if this PPF deposit is made every year on or before April 5, you will earn interest of Rs 21.17 lakh and a maturity amount of Rs 45.17 lakh at the end of the 15 year tenure. Thus, you will earn an extra tax-free interest of Rs 24,958.
Example 2: Monthly PPF deposits
There can be some individuals who make monthly deposits of Rs 12,500 totalling Rs 1.5 lakh PPF investment at the year’s end. Suppose each deposit is made after the 5th of every month, say, the 10th of every month; then the total interest earned on PPF deposits for a 15-year tenure would be Rs 19.55 lakh.
On the other hand, if you made same PPF deposits, say, on the 3rd of every month, then PPF deposits would earn a total interest of Rs 19.80 lakh at the end of the 15 years. By making PPF monthly deposits on or before the 5th of every month, you would earn an extra tax-free interest of Rs 24,958.
Even though the difference is the same, the total interest earned is higher in lumpsum investment before April 5 than the interest earned in monthly contribution before the 5th of every month.
Why PPF is a tax-efficient investment
The biggest USP of the PPF is the EEE (exempt-exempt-exempt) tax status. The interest earned and the maturity amount of the PPF are exempt from tax. Hence, by ensuring that deposits are made before April 5th for lump sum investments and by the 5th of each month for monthly deposits, you can maximise your tax-free interest earnings.
Key PPF Investment Details
- Maximum Investment: The maximum amount you can deposit into your PPF account in a financial year is Rs 1.5 lakh.
- Minimum Deposit: The minimum deposit required in a PPF account is Rs 500 in a financial year which is required to keep the account active.
- Interest calculation and credit: Interest on a PPF account balance is calculated monthly, but the interest earned is credited at the end of the financial year.
Conclusion
Making your PPF deposit before April 5 or by the 5th of every month ensures you don’t miss out on earning the maximum interest on your investments. While small delays may seem insignificant, over the long term, they can add up to considerable losses in interest earnings. Planning your PPF investments with this in mind will help you take full advantage of the tax-free returns that this government-backed scheme offers. This applies even if you don’t opt for the old tax regime for the current financial year.
Source Link
