Do you make regular monthly deposits into your PPF account? But did you know that the date of deposit can have a significant impact on your overall earnings? PPF has a secret rule called the “5-date rule.” This small mistake could cost you thousands, if not lakhs, of rupees in interest benefits. Unawareness of this rule results in many investors missing out on an entire month’s interest. This Google Search-friendly article will explain this powerful rule in simple terms, so you can ensure maximum returns on your tax-free funds.
What is the PPF 5th Rule
There is a specific method for calculating monthly interest on a PPF account, which is tied to the 5th of every month. Monthly interest in PPF is calculated based on the minimum balance in the account on the 5th of the month and at the end of the month. If you deposit money before the 5th of the month (i.e., between the 1st and 5th), your deposit is included in the interest calculation for that entire month.
Disadvantage
However, if you deposit on or after the 6th, your new deposit will not be included in the interest calculation for that month. Interest on that amount will start accruing from the next month. In simple terms: The best time to invest is between the 1st and 5th of the month.
Delayed Investment Can Cause Huge Financial Losses
The significant loss that can result from not following this rule can be illustrated with a concrete example. Suppose you deposit ₹10,000 into a PPF every month. If you invest for the month of April on the 6th, you will not receive the April interest on the ₹10,000. Interest calculation will begin in May.
If you continue investing after the 5th of every month for 15 consecutive years, at the current interest rate of 7.1%, this small mistake could result in a direct loss of interest benefits of over ₹1 lakh. This loss increases rapidly over time due to compounding. Therefore, it is extremely important to strictly adhere to the 5th deadline to maximize returns.
Powerful Benefits of PPF and Tax Benefits (Triple E)
The power of PPF is not limited to safe returns; it is also unparalleled in terms of tax benefits. PPF falls under the Triple E (Exempt-Exempt-Exempt) category, meaning it offers three types of tax exemptions:
Exemption on the invested amount
Up to ₹1.5 lakh you deposit annually is tax exempt under Section 80C of the Income Tax Act.
Exemption from the interest earned
The interest earned on your investment each year is also completely tax-free.
Exemption on the maturity amount
The entire amount (both principal and interest) received upon maturity after 15 years is also tax-free.
The interest rate on PPF is determined by the government every quarter and is currently 7.1% per annum. The scheme matures in 15 years, but you can extend it any number of times in blocks of 5 years.
