The Public Provident Fund (PPF) is not only a good investment option, but it also provides income tax benefits, as the interest earned and the final maturity amount on PPF deposits are tax-free.
However, many investors are unaware of how interest on PPF investments is calculated. An investor can save up to Rs 1 crore, but in order to do so, he or she must understand the timing of investment, whether lump-sum or monthly investment is preferable, and how interest on deposits is calculated.
Since 2020, the government has kept the PPF interest rate at 7.1 percent, and it has also announced a significant reduction in interest rates on small savings schemes, including PPF.
The interest on the PPF balance is calculated monthly and credited to the subscriber-only account at the end of the fiscal year (March 31).
The minimum balance in a PPF account is calculated between the fifth and last day of each month, and if a subscriber invests after the fifth day, he will receive interest on the previous month’s balance. However, if the investment is made before the 5th of the month, the customer will receive interest on both the current month’s balance and the previous month’s balance.
If you want to reach the Rs 1 crore target through PPF, you should consider depositing money in the account before the 5th of the month.
Let’s break down how much money one needs to invest each month to accumulate Rs 1 crore with PPF.
If you invest Rs 1.5 lakh per year and earn 7.1 percent interest, your PPF account will have a corpus of around Rs 40 lakh after 15 years if you invest Rs 1.5 lakh per year (or Rs 12,500 per month in PPF account.) This calculation is performed while interest rates remain constant for the next 15 years.
Notably, the government changes the PPF interest rate on a quarterly basis. As a result, the PPF interest rate may fluctuate during the investment period.