April 5 is important for Public Provident Fund (PPF) investors. Not just the fifth of April but the fifth of every month is significant for PPF subscribers. PPF accounts are a decent investment venue for customers not only because they help you save your money, but also help you cut down on income tax outgo. But PPF rules are hugely beneficial for people who deposit their instalments before or on the fifth of every month. This is because the interest rate offered on PPF accounts – currently 7.6 per cent – is calculated on the minimum balance in the account between the fifth day of the month and the last day of the month. If you deposit your money after the fifth day of the month, you stand to lose out on substantial interest income for that particular month.
“Assume that at the beginning of the month the investor has Rs. 10,000 in the PPF account and he deposits another Rs. 5,000 in the PPF account on 7th day of the month, then the investor will be getting interest on Rs. 10,000 not on Rs. 15, 000 as the minimum balance in the PPF account between the 5th day and the last day of the month is Rs. 10,000. The investor is losing out on interest income on Rs. 5,000. Hence, it is advisable to deposit money in PPF accounts on or before the 5th day of the month to earn interest for the month,” said Pradeepta Sethi, Associate Professor, Finance & Strategy, T. A. Pai Management Institute.
You might think that paying a small amount of money after the fifth won’t make much of a difference but it does. Consider this: interest calculation is done every month on the lowest balances in the PPF account between fifth and the last day of the month. PPF invested before the fifth of every month is entitled to interest for the entire month. “A few hundreds earned extra every month turn into thousands on compounding basis as the PPF is a long-term option,” said Dinesh Rohira, Founder & CEO, 5nance.com.
Mr Rohira went to give an example to better explain his point. “If you deposit before 5th of every month, you earn extra monthly interest of close to Rs. 79 and for 10 months it would help you to earn Rs. 792 more, at the current interest rate of 7.6 per cent. This could be more than one-eighth of the interest you earn for the whole year. Even a one-time deposit before April 5th, 2018 will earn interest for the whole year,” he further clarified.
So basically, investing before or the fifth day of every month in PPF accounts, gives you an extra interest income of five days and this same investment also helps you save on tax.
But why has the government selected the fifth of every month?
“This is ostensibly done to allow salaried individuals to deposit money after they get the salary, which is a nice gesture, not losing out on interest for the month as the salary hits the accounts between 1-5th of the month usually. This allows people to deposit money on fifth and get interest for 30 days while depositing money only for 25 days, effectively earning extra tax-free month,” said Nitin Balwani, Dean – Planning & Development, IFIM Business School.
Investment in PPF accounts of up to Rs. 1,50,000 a year ensures you tax deduction under Section 80C of the Income Tax Act. Since the maximum yearly limit to avail a tax deduction under this Section is Rs. 1,50,000, you may consider investing Rs. 12,500 every month.
“If monthly investments of Rs. 12,500 are made before the 5th of the month for 15 years, the maturity value can be over Rs. 45 lakh…A person who always invested before the 5th of the month, gained about 2.5 times the monthly investment, compared to the person who always invested after the 5th,” said CS Sudheer, CEO and Founder of IndianMoney.com, a financial advisory firm. “This means you can save more than Rs. 1.5 lakh, over the 15-year period which is a substantial saving,” he added.
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