Why RD for PPF Yearly Funding is a Fallacious Technique?

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

In the case of Public Provident Fund (PPF), nearly 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 preferred 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 yr and nonetheless seize full-year curiosity in PPF. However is that this actually the neatest strategy to develop your cash?

The truth is RD for PPF yearly funding is definitely a unsuitable technique. By doing this, you’re 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 Fallacious 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 yr after yr
• So in case you make investments Rs.10,000 earlier than the fifth of each month, that installment earns curiosity for that month plus the remainder of the yr

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

How RD Works (and Why It Appears Engaging)

• Suppose you make investments Rs.10,000 per 30 days in a one-year RD.
• After a yr, the RD matures, and also you switch the maturity to PPF in April.
• On paper, it seems to be good as a result of:
  • You earn curiosity in RD for 12 months
  • Then you definitely earn PPF curiosity for a full yr (because you invested lump sum in April)

However right here’s what’s missed:

1. RD curiosity is absolutely taxable (added to your earnings, taxed at your slab price).
   • 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 yr 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 need to make investments Rs.1,20,000 per yr (Rs.10,000/month) for 15 years
• Possibility 1: Make investments month-to-month in PPF earlier than fifth of every month
• Possibility 2: Put money into RD, then switch yearly lump sum to PPF in April

Appropriate Simulation Outcomes

By the fifteenth yr, the distinction is Rs.35,000, though we assumed RD price = PPF price (7.1%). In actuality, since RD is taxable and normally decrease, the hole will probably be even greater.

Key Observations

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

Widespread FAQs

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

2. What if my money circulate doesn’t permit month-to-month deposits?
In case you can solely prepare funds month-to-month, simply deposit immediately into PPF as an alternative of RD. You earn tax-free compounding instantly.

3. Can RD nonetheless be helpful?
RD may be helpful for short-term targets or as a pressured saving device, 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 price. The benefit of avoiding RD taxation and beginning compounding early at all times stays.

Delusion vs Actuality

• Delusion 1: Lump sum in April is at all times higher.
  Solely true if you have already got money prepared. In case you don’t, month-to-month PPF earlier than fifth beats RD + lump sum.
• Delusion 2: RD helps earn additional returns earlier than PPF.
  False, as a result of RD curiosity is taxable and also you lose a yr of PPF compounding.
• Delusion 3: Distinction is negligible.
  Over 15 years, the hole may be Rs.35,000–Rs.50,000 or extra, relying on tax bracket and RD price.

Remaining Conclusion

At first, utilizing an RD to construct a yearly PPF corpus seems to be good. However if you consider taxation and misplaced compounding, the fact is obvious:

RD for PPF yearly funding is a unsuitable technique.

If you wish to maximize your PPF returns:

• Deposit earlier than the fifth of each month, or
• When you’ve got lump sum in April, deposit it immediately.

With this method, you:

• Earn larger, tax-free returns,
• Keep away from pointless RD taxation,
• Construct self-discipline and ease,
• And stroll away with a much 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.

Seek advice from all our earlier posts associated to PPF-related articles right here – EPF and PPF