Well, rarely do people understand the logic or relation between the fifth day of the month and Public Provident Fund (PPF) investment. If you wish to earn maximum interest in your PPF contributions, then invest on or before the 5th of every month.

This idea was explained in detail by Aasif Hirani, director, Tradebulls Securities in an Financial Express article. Hirani wrote, “The ideal option would be to invest Rs 1.5 lakh between April 1 and April 5 (total limit for investing in a year is Rs 1.5 lakh) at the start of the financial year. But many would not have the entire sum to invest in the beginning of the year, so they can deposit some amount regularly every month but they should try to deposit it by the 5th of that month to avail the maximum benefit as per the interest calculation method.” He added that a minimal sum would also work but should still invest. He advises better to invest money in PPF on the fifth of the month.

PPF investment, its interest earned and final maturity amount is tax free, which makes this investment a lot more attractive. However, Hirani asserted, there are many investors who do not understand the way PPF operates and its interest is paid.

Compared to other saving schemes, PPF offers better interest with less or no risk. PPF interest rate is now at 7.1 per cent which varies.

He added that while interest on PPF balance is calculated on a monthly basis, it is credited to the subscriber’s account at the end of the financial year (March 31). “So in a nutshell, if you invest after the 5th of that month, you will only get interest on the previous month’s balance but if you invest on or before the 5th of that month, then you will get interest on the current month’s balance apart from previous month’s balance,” explained Hirani.

There are two scenarios:

One is where the subscriber invests before the fifth of the month. If Rs 50,000 is invested on August 3, the interest rate is 7.1 per cent and the subscriber balance is Rs 3 lakh on July 31, then the monthly interest would be Rs 2, 071. This figure was concluded based on calculating interest (7.1 per cent) divided by 12 months x minimum balance (7.1%/12 X 3.5 lakh).

In the second scenario, the subscriber deposits Rs 50,000 on August 6 and our balance as on July 31 is Rs 3 lakh. So the minimum balance between August 5 and August 31 is Rs 3 lakh so our monthly interest would be (7.1%/12 X 3.0 lakh) = Rs 1,775.

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