For individuals investing in Public Provident Fund (PPF) accounts for the upcoming financial year, 2025-26, it is crucial to ensure that funds are credited into the account before April 5. By doing so, investors can enjoy higher interest earnings on their PPF investment.
The PPF scheme, backed by the government, offers an annual interest rate of 7.1 per cent as per the most recent government small savings scheme rates.
Investors have the flexibility to deposit any amount between Rs. 500 and Rs. 1.5 lakh annually in a PPF account. This investment can be made either as a lump sum or in installments. It is important to note that individuals are allowed a maximum of 12 yearly installment payments into a PPF account.
Based on the PPF scheme guidelines, the interest in the PPF account is determined by the minimum balance in the account between the 5th of each month and the end of the month. To maximise earnings, investors should make a lumpsum payment before April 5 for the financial year. This is particularly important for individuals who prefer to make a single annual bulk deposit, as any delay in payment will lead to the loss of a month’s worth of interest on the annual deposit.
Therefore, individuals who choose to make a one-time deposit in their PPF account before April 5 will receive increased returns. This strategy will be particularly advantageous for those who opt for an annual lump sum deposit.
The interest on PPF accounts is computed on a monthly basis but is only credited to the account at the conclusion of each financial year.
To elaborate, if you deposit Rs 1.5 lakh into your PPF account before April 5, 2025, the entire amount will be taken into consideration for interest calculation for that month. Based on the current interest rate of 7.1%, you would earn Rs 10,650 in interest annually (Rs 1,50,000 * 7.1%).
If you complete the transaction after April 5, then you will miss out on the interest for the first month. As a result, interest will only be earned for 11 months of the financial year, excluding April. With a deposit of Rs 1.5 lakh at the current interest rate of 7.1%, this would amount to Rs 9,762.50 for the entire year.
The compounding interest
The PPF scheme is a long-term investment plan centered around compounding interest. With a lock-in period of 15 years, consistent and timely investments can yield significant returns. For instance, investing between April 1 and April 5 each year for 15 years could result in earnings of Rs 18,18,209, with a maturity amount of Rs 40,68,209 upon completion.
Conversely, procrastinating until the last minute each financial year could lead to lower returns. By investing in this manner for 15 years, one may earn Rs 15,48,515, with a reduced maturity amount of Rs 37,98,515.
Moreover, making a lump sum investment annually is more advantageous than monthly deposits. For instance, investing Rs 12,500 before the fifth of each month could result in a total amount of Rs 39,44,599 at the end of 15 years.
By depositing a lump sum amount into the PPF account between April 1 and April 5 of a financial year, the investor will have the opportunity to earn an additional interest of Rs 1,23,610.
Taxation of PPF
One should note that the interest earned from a PPF account is tax-exempt. Therefore, failing to make deposits before the 5th of each month or before April 5 could result in PPF account holders missing out on the opportunity to earn more tax-exempt interest. Individuals are allowed to invest a maximum of Rs 1.5 lakh in a PPF account in a financial year.
PPF under New Tax Regime and Old Tax Regime
In the new tax regime, there is no provision to claim a deduction of up to Rs 1.5 lakh/year under section 80C for investments in a PPF account. However, the interest earned and the amount withdrawn on maturity remain tax-free.
In contrast, the old tax regime allows for section 80C deduction against investments in a PPF account, enabling individuals to claim a combined deduction of up to Rs 1.5 lakh for investments in various tax-saving schemes. Additionally, similar to the new regime, the interest earned and the amount withdrawn on maturity are also exempt from taxes in the old regime.
PPF stands out as a savings scheme that is exempt from taxes on the maturity amount under both old and new tax systems. This feature translates into higher effective returns compared to the nominal interest rate provided by the scheme.