Why RD for PPF Yearly Funding is a Flawed Technique?

Many save in RD for subsequent 12 months’s PPF deposit, however this hurts returns. Right here’s why month-to-month PPF earlier than fifth is a wiser technique.

In relation to Public Provident Fund (PPF), virtually each investor is aware of the golden rule—deposit your cash earlier than the fifth of the month to earn curiosity for that month.

Due to this, many individuals comply with a well-liked technique: they put cash right into a Recurring Deposit (RD) all year long, and within the subsequent April (between 1st and fifth), they switch the RD maturity to PPF as a lump sum.

At first look, this feels just like the “better of each worlds”: you earn curiosity from RD for the 12 months and nonetheless seize full-year curiosity in PPF. However is that this actually the neatest option to develop your cash?

The fact is RD for PPF yearly funding is definitely a incorrect technique. By doing this, you might be dropping out on compounding and paying pointless taxes. Let’s perceive this step-by-step with numbers.

Why RD for PPF Yearly Funding is a Flawed Technique?

How PPF Curiosity Works

• Present PPF rate of interest = 7.1% (tax-free)
• Curiosity is calculated month-to-month on the bottom stability between fifth and month-end
• Credited yearly, however successfully compounding works 12 months after 12 months
• So for those who make investments Rs.10,000 earlier than the fifth of each month, that installment earns curiosity for that month plus the remainder of the 12 months

In brief, the sooner you deposit every month, the extra months your cash earns tax-free curiosity.

How RD Works (and Why It Appears Enticing)

• Suppose you make investments Rs.10,000 monthly in a one-year RD.
• After a 12 months, the RD matures, and also you switch the maturity to PPF in April.
• On paper, it appears sensible as a result of:
  • You earn curiosity in RD for 12 months
  • Then you definately earn PPF curiosity for a full 12 months (because you invested lump sum in April)

However right here’s what’s missed:

1. RD curiosity is absolutely taxable (added to your revenue, taxed at your slab fee).
   • If you’re within the 30% tax bracket, a 7.1% RD earns solely ~4.9% post-tax.
2. Misplaced compounding – Within the month-to-month PPF route, every installment earns tax-free compounding for 15 years. Within the RD route, your PPF compounding begins one 12 months later for every installment.

Present 1-Yr RD Charges (August 2025)

Even on the greatest RD charges, post-tax returns are nowhere near PPF’s 7.1% tax-free return.

Actual Comparability: Month-to-month PPF vs RD ? PPF

Let’s assume:

• You wish to make investments Rs.1,20,000 per 12 months (Rs.10,000/month) for 15 years
• Possibility 1: Make investments month-to-month in PPF earlier than fifth of every month
• Possibility 2: Spend money on RD, then switch yearly lump sum to PPF in April

Appropriate Simulation Outcomes

By the fifteenth 12 months, the distinction is Rs.35,000, though we assumed RD fee = PPF fee (7.1%). In actuality, since RD is taxable and normally decrease, the hole will likely be even larger.

Key Observations

1. Small leak turns into massive loss – Yearly, you lose just a little to RD taxation and delayed compounding. Over 15 years, this provides up.
2. Tax-free all the time wins – PPF’s tax-free curiosity makes it unbeatable in comparison with RD.
3. RD is pointless intermediary – As an alternative of RD, direct PPF month-to-month deposits give higher returns with out further steps.
4. Simplicity is the sting – With direct PPF, you don’t rely upon RD maturities or tax calculations.

Frequent FAQs

1. Is lump sum in April higher than month-to-month deposits?
Sure, if you have already got the total cash obtainable in April, lump sum is good. However for those who don’t, then month-to-month deposits earlier than fifth work greatest.

2. What if my money stream doesn’t permit month-to-month deposits?
For those who can solely prepare funds month-to-month, simply deposit instantly into PPF as a substitute of RD. You earn tax-free compounding instantly.

3. Can RD nonetheless be helpful?
RD might be helpful for short-term objectives or as a pressured saving software, however not for constructing a PPF corpus.

4. What if PPF charges change?
Charges might change quarterly, however each lump sum and month-to-month deposits get the prevailing fee. The benefit of avoiding RD taxation and beginning compounding early all the time stays.

Fable vs Actuality

• Fable 1: Lump sum in April is all the time higher.
  Solely true if you have already got money prepared. For those who don’t, month-to-month PPF earlier than fifth beats RD + lump sum.
• Fable 2: RD helps earn further returns earlier than PPF.
  False, as a result of RD curiosity is taxable and also you lose a 12 months of PPF compounding.
• Fable 3: Distinction is negligible.
  Over 15 years, the hole might be Rs.35,000–Rs.50,000 or extra, relying on tax bracket and RD fee.

Remaining Conclusion

At first, utilizing an RD to construct a yearly PPF corpus appears sensible. However if you think about taxation and misplaced compounding, the truth is obvious:

RD for PPF yearly funding is a incorrect technique.

If you wish to maximize your PPF returns:

• Deposit earlier than the fifth of each month, or
• In case you have lump sum in April, deposit it straight away.

With this strategy, you:

• Earn larger, tax-free returns,
• Keep away from pointless RD taxation,
• Construct self-discipline and ease,
• And stroll away with an even bigger maturity corpus.

In private finance, typically the neatest technique is the only one. For PPF, that technique is direct month-to-month deposits earlier than fifth—not RD detours.

Consult with all our earlier posts associated to PPF-related articles right here – EPF and PPF