How to earn maximum interest from PPF account in combination with e-RD?

I am writing this article to help understand the concept of PPF account and the earning maximum interest from it. If you are aware about PPF then directly jump to 3^rd paragraph.

What is PPF?

PPF (Public Provident Fund) is the government scheme to invest for those who want to save additional money for their retirement. This is one of the best instruments for retirement investment. PPF is an optional account but it is considered as the safest investment option. PPF account is opened at post office or selected branches of selected banks. You can opt any bank because PPF account follows standard format and interest is not bank dependent, every year it is declared by Indian government (For 2013-14, interest rate was 8.7%). I recommend State Bank of India (SBI) to open PPF account. If you have SBI saving account and your branch does not have PPF account facility, don’t worry, open PPF account at any SBI branch which have PPF facility, it will automatically mapped to your saving account. SBI internet banking will make your work very easy. The minimum amount deposited to PPF account is Rs. 500 and maximum amount is Rs. 1,00,000. The amount deposited in PPF account is income tax deductible under 80C of IT Act. The locking period for PPF account is 15 years after that you can withdraw it or it can be further extended by block of 5 years. PPF has a facility to withdraw some amount from your account after 5 years with some restrictions but I suggest do not withdraw the amount unless you have disastrous condition. You can only open one PPF account but you can have one more PPF account on the name of your minor child but only as a guardian. You cannot open PPF account as a joint account.

How PPF interest is calculated?

PPF interest is calculated on monthly basis on lowest balance between end of 5^th day of month and last day of month but it is added to PPF account at the end of year. The important thing to note that the interest is calculated monthly but not compounded monthly, it is added to at the end of year. This is bit complex but it is very important to understand the method.

Maximum interest hack:

If you want to earn maximum interest on your PPF account then invest money once in the year but before 5^th April. In this way, you can earn interest throughout the year because the money you have invested will be the lowest balance for every month hence you can get maximum interest. If you don’t have onetime money and you want to add the money every month then invest it before 5^th day of every month. (But I have a super hack for you.)

The following 3 sample tables will explain how the thing works.

Scenario 1:

Rs 60,000 invested once before 5th Apr
No.	Month	Money Invested	Invested On	Lowest Balance (from 5th to end of month)	Interest Rate	Monthly Interest
1	Apr	60000	Before 5th	60000	8.7 %	435
2	May	0	-	60000	8.7 %	435
3	June	0	-	60000	8.7 %	435
4	July	0	-	60000	8.7 %	435
5	Aug	0	-	60000	8.7 %	435
6	Sept	0	-	60000	8.7 %	435
7	Oct	0	-	60000	8.7 %	435
8	Nov	0	-	60000	8.7 %	435
9	Dec	0	-	60000	8.7 %	435
10	Jan	0	-	60000	8.7 %	435
11	Feb	0	-	60000	8.7 %	435
12	Mar	0	-	60000	8.7 %	435
Total interest earned for year						5220
PPF Balance at the end of year						65220

Scenario 2:

Rs 5,000 invested before 5th of every month
No.	Month	Money Invested	Invested On	Lowest Balance (from 5th to end of month)	Interest Rate	Monthly Interest
1	Apr	5000	Before 5th	5000	8.7 %	36.25
2	May	5000	Before 5th	10000	8.7 %	72.50
3	June	5000	Before 5th	15000	8.7 %	108.75
4	July	5000	Before 5th	20000	8.7 %	145.00
5	Aug	5000	Before 5th	25000	8.7 %	181.25
6	Sept	5000	Before 5th	30000	8.7 %	217.50
7	Oct	5000	Before 5th	35000	8.7 %	253.75
8	Nov	5000	Before 5th	40000	8.7 %	290.00
9	Dec	5000	Before 5th	45000	8.7 %	326.25
10	Jan	5000	Before 5th	50000	8.7 %	362.50
11	Feb	5000	Before 5th	55000	8.7 %	398.75
12	Mar	5000	Before 5th	60000	8.7 %	435.00
Total interest earned for year						2827.50
PPF Balance at the end of year						62827.50

Scenario 3:

Rs 5,000 invested after 5th of every month
No.	Month	Money Invested	Invested On	Lowest Balance (from 5th to end of month)	Interest Rate	Monthly Interest
1	Apr	5000	After 5th	0	8.7 %	00.00
2	May	5000	After 5th	5000	8.7 %	36.25
3	June	5000	After 5th	10000	8.7 %	72.50
4	July	5000	After 5th	15000	8.7 %	108.75
5	Aug	5000	After 5th	20000	8.7 %	145.00
6	Sept	5000	After 5th	25000	8.7 %	181.25
7	Oct	5000	After 5th	30000	8.7 %	217.50
8	Nov	5000	After 5th	35000	8.7 %	253.75
9	Dec	5000	After 5th	40000	8.7 %	290.00
10	Jan	5000	After 5th	45000	8.7 %	326.25
11	Feb	5000	After 5th	50000	8.7 %	362.50
12	Mar	5000	After 5th	55000	8.7 %	398.75
Total interest earned for year						2392.50
PPF Balance at the end of year						62392.50

Analysis:

§  When you invest Rs. 60,000 once a year but before 5^th Apr then you get the interest Rs. 5,220 and the final amount will be Rs. 65,220.

§  When you invest Rs. 5,000 (5000 X 12 = 60000) every month before 5^th day of every month then you get interest Rs. 2,827.50 and the final amount will be Rs. 62,827.50.

§  When you invest Rs. 5,000 (5000 X 12 = 60000) every month after 5^th day of every month then you get interest Rs. 2,392.50 and the final amount will be Rs. 62,392.50.

§  One time deposition will earn Rs. 2392.50 (i.e. 54.17%) more than the money invested on every month before 5^th.

Super Hack:

The above hack is good but onetime investment is main problem for middle class investor. For such people, I have a super hack. In the starting of this article, I discussed about SBI saving and PPF account. If you don’t use SBI internet banking it will be cumbersome for you. I suggest opening an e-RD account on 2^nd or 3^rd Apr in your SBI saving account for a year. Set standing instructions to that e-RD account so that the amount will be automatically transferred from your saving account. On next 2^nd or 3^rd Apr, e-RD account will be matured. The maturity amount includes every month’s deposited money and interest (please refer the explanation example given below). You can keep interest and transfer the remaining amount to PPF account through standing instructions before 5^th Apr. Note that, SBI allows 1 year standing instructions only, means every year you have to set standing instructions for your PPF account.

Explanation example:

If you want to deposit onetime Rs. 60,000 before 5 Apr then open e-RD account of Rs. 5,000 on 2^nd Apr. The e-RD account will be matured on next 2^nd Apr. The maturity amount will be Rs. 62,984.08 (60,000 +2,984.08) (SBI e-RD current interest rate is 9%). Now transfer Rs. 60,000 to PPF account by keeping interest of e-RD account. This will give you double benefit of additional interest.

Source: For tables, reference is taken from www.jagoinvestor.com