If a deposit for this financial year is made into a PPF account after April 5, the account holder will earn lower interest from the PPF balance. This is because as per PPF scheme rules, the interest is calculated on the basis of the lowest balance in the PPF account at the end of the fifth day of a month and end of the month. So if an individual is making a lump sum investment, ensure that the money is credited into the PPF account by April 5.
The PPF scheme rules further state that interest is calculated on a monthly basis but is credited at the end of the financial year. Hence, if an individual makes monthly payments to a PPF account, ensure that the money is credited into the account before the fifth of every month to earn higher interest.
Let us use an example to understand how much interest will be earned on a PPF account if a lump sum deposit is made before April 5. Suppose an individual opens a PPF account and makes an investment of Rs 1.5 lakh into it on April 4. As the deposit is made before April 5, the lowest account balance between the fifth and the end of the month (Rs 1.5 lakh in this case) will be used to calculate the interest.
Though the interest on PPF account is reviewed every quarter, here we have assumed an interest rate of 7.1% per annum throughout the year. Hence, the individual will earn an interest of Rs 10,650 on the Rs 1.5 lakh deposit.
In the above example, if the PPF account is credited into the account after April 5, the individual will lose out on the interest of the first month. For FY 2023-24, the individual will earn interest only for 11 months. This will be Rs 9,762.50, or rounded off to Rs 9,763, on a deposit of Rs 1.5 lakh.
As PPF is a long-term investment scheme, one must not forget the compounding aspect. The scheme comes with a lock-in period of 15 years. Hence, a PPF investment of Rs 1.5 lakh made between April 1 and April 5 every financial year will fetch an interest of Rs 18,18,209 and a maturity amount of Rs 40,68,209. However, if a lump sum investment is made towards the end of the financial year, say after March 5 every financial year, the depositor will not get any interest for the year. If you continue doing this for 15 years, the PPF account will fetch an interest of only Rs 15,48,515 and a maturity amount of only Rs 37,98,515.
By investing in the PPF account before April 5 will help you earn more tax exempt interest.
Further, an individual will earn a higher interest by making a lump sum investment every financial year than monthly deposits in PPF account. If an individual makes a PPF investment of Rs 12,500 before the fifth of every month, the individual will get a maturity amount of Rs 39,44,599. The individual will earn extra interest of Rs 1,23,610 by making a lump sum investment into the PPF account between April 1 and April 5 of a financial year.