PPF (Public Provident Fund) is one of the low risk, tax saving, investment option available that may be suitable for many. PPF investments have a lock-in-period of 15 years. Currently the rate of interest for investment in PPF account is 8% (FY 2018-2019).
PPF is mainly used, by many, mostly during the last days of the financial year to save taxes. But tax saving should be planned as a goal (tax planning instead of tax saving) early during a financial year rather than end up making unsuitable decisions in a haste by waiting until the last moment. The time of investment (within a financial year) in a PPF account makes an impact in the amount of interest earned in that year and subsequently on the wealth created over the period of investment.
Suppose, you open a PPF account on the 1st of April and you want to deposit Rs. 1,50,000 into your PPF account in that year and the rate of interest is 8%. Now, we will consider two scenarios –
Scenario 1: invest 150000 in 3 installments (say) of Rs 50000 each on 1st April, 1st August and 1st December. The 1st deposit done on 1st day of financial year i.e. 1st April will earn interest for the entire year = (50000 x 8 x 12/12) / 100 = 4000 (using the formula for S.I. Interest = (Principle x Rate x Time)/100). Similarly, the 2nd deposit made on the 1st day of August will earn interest for 8 months = (50000 x 8 x 8/12) / 100 = 2667 and the 3rd deposit made on the 1st day of December will earn interest for 4 months = (50000 x 8 x 4/12) / 100 = 1333. So, the total interest earned for the year on an investment of Rs 150000 is Rs. 8000 (4000+2667+1333).
Scenario 2: invest 150000 on the 1st day of the financial year i.e. 1st of April. The deposit done on 1st day of financial year will earn interest for the entire year = (150000 x 8 x 12/12) / 100 = 12000 (using the formula for S.I. Interest = (Principle x Rate x Time)/100). So, the total interest earned for the year on an investment of Rs 150000 is Rs. 12,000 ).
So, we earn better returns with early investments within a financial year.
Also, the interest earned in a year is added to the deposits done in the next financial year and interest is calculated on that amount and so on for coming years.
So, it is clear that early investments done within a financial year gives better returns that increases the wealth created for the whole investment period. This calls for Tax Planning before the start of a financial year, as unplanned deposits may hamper our financial goals.