Public Provident Fund: Making PPF investment on these days will reduce your returns; Check how

Public Provident Fund (PPF) is undoubtedly one of the best and safest investment options that can help you accumulate a huge corpus over a period of years and also save income tax. Currently, the PPF account interest rate is 8% and there is a lock-in period of 15 years. Often salaried employees in the high tax bracket treat PPF account as an option where they can deposit some money as a last resort to save taxes towards the end of the financial year and before filing the annual income tax return. However, you will be surprised to know that such a practice can delay your life's financial goals by a huge margin.

The following illustration will show that the timing of investment is very important if you plan to make the most out of the PPF investment. Take a look: 

First, suppose you open the PPF account on 1st April 2019 (at the current rate of interest of 8% per annum and the maximum deposit limit at Rs 1.5 lakh per annum) and deposit Rs 80,000 on the day of opening the account, Rs 40,000 on 4th August 2019 and Rs 30,000 on 10 November 2019. 

The PPF account interest rate is calculated only on the last day of the financial year. So it doesn't matter when you deposit the amount throughout the financial year. The interest earned will reflect on your passbook only on or after the last day of the financial year. 

ALSO READ | ALSO READ | PPF account maximum limit per year alert: You won't earn interest on this deposit

If you get your PPF passbook updated before the last day of the financial year, it will only reflect the deposited amount in the year. 

Now, taking into consideration the above examples, check how the interest rate will be calculated: 

- The first investment of Rs 80,000 done on the first day of the new financial year (April 1, 2019) will earn interest for the entire year. 

- The second deposit of Rs 40,000 will earn interest only from August till March (around eight months).

- The third deposit of Rs 30,000 will earn interest from December to March only (Four months). 

- The interest earned in the first year can be calculated by using the simple interest formula we learnt in schools: "Principle x Time x Rate of Interest/100". 

The time in terms of year in the three cases will be 12/12 = 1 year; 8/12 = 2/3 year; and 4/12=1/3 year respectively. The interest you will earn will be: 

1. Rs 80,000 x 12/12 x 8/100 =  Rs 6400
2. Rs 40,000 x 8/12 x 8/100 = Rs 2133.33
3. Rs 30,000 x 4/12 x 8/100 =  Rs 800

Thus the total interest earned on your PPF deposit in the year will be = Rs 6400 + Rs 2133 + Rs 800 = Rs 9333.

However, if you deposit the entire Rs 1,50,000 (Rs 80,000 + Rs 40,000 + Rs 30000) on the first day of the financial year, the interest rate earned by you will be equal to Rs 1,50,000 x 12/12 x 8/100 = Rs 12,000. 

This interest amount is added to your total deposit in the next financial year for the calculation of the total interest earned and so on in subsequent years. 

From the above illustration, it is clear that investing in the PPF account in the very beginning of the financial year can give better returns. 

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At the current rate of interest, the PPF account can make you a crorepati in around 25 years. However, mistiming the annual investment can delay your dream of becoming a crorepati.  Hope, you find this technical detail helpful.