The Public Provident Fund (PPF) is one of the most popular tax-saving schemes. It can also be a very good investment option for retirement planning and but many of us treat it as just a tax-saving tool. Till the accounts department sends us a reminder for furnishing tax-saving documents, we don't think much about it.
How PPF interest is calculated: The interest on PPF account is no longer fixed and is now pegged to yield on government bonds. For this fiscal year (2013-14), the government will pay 8.7 per cent. The interest on balance in your PPF account is compounded annually and is credited at the end of the year. But the point to remember is that the interest calculation is done every month: the interest is calculated on lowest balances in account between 5th and last day of the month.
So if you don't deposit on/before the 5th of a month, you don't earn interest for that month.
(Also read: Seven must-know facts about PPF accounts)
The ideal way to maximize the interest on your PPF account would be to invest Rs 1 lakh (the maximum investible amount in a year) at one go at the beginning of the financial year. PPF accounts follow an April-to-March year so to earn the maximum interest, you should deposit the amount on/before 5th of April every year. A one-time deposit will earn interest for the whole year.
On the other hand, if you want to deposit some amount every month, remember to deposit on/before 5th of that month. This will help you to earn interest for that month. A few hundreds earned extra every month turn into thousands as the PPF is a long-term saving option.
Suppose you want to deposit Rs 10,000 every month in 10 instalments. A back-of-the-envelope calculation suggests that if you deposit before 5th of every month, you can earn extra monthly interest of close to Rs 75 and for 10 months it would help you to earn Rs 750 more, at the current interest rate of 8.7 per cent. This could be more one-sixth of the interest you earn for the whole year.
Disclaimer: "Investors are advised to make their own assessment before acting on the information."
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