Public Provident Fund (PPF) is a popular savings scheme offered by the Indian government through post offices and banks. PPF has always been trusted by risk-averse investors seeking long-term wealth accumulation. With its tax-free returns, government backing, and compounding benefits, PPF stands out among several other small savings schemes offered by the government.
In this story, we will give a detailed breakdown of how this popular scheme works and why it could be your ideal investment choice for securing your financial future.
Why choose PPF for long-term savings?
Safety and growth:
The PPF scheme combines the safety of government backing with the power of compound interest. Your deposits earn interest, currently at 7.1%, which is compounded annually, ensuring that your money grows over time.
Tax-free returns:
PPF falls under the Exempt-Exempt-Exempt (EEE) category, which means:
-Deposits are eligible for deductions under Section 80C of the Income Tax Act.
-Interest earned is tax-free.
-The maturity amount is also exempt from tax.
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Flexibility in investment:
PPF scheme offers a minimum annual deposit requirement of just Rs 500, making it highly accessible even for those with modest incomes. On the other hand, the maximum annual deposit is capped at Rs 1.5 lakh, providing ample room for disciplined savings. This flexible range ensures that the scheme caters to a diverse group of investors, including salaried professionals, housewives managing household finances, and small entrepreneurs looking for secure investment options.
PPF Rules: Extension facility
There is a facility to extend the PPF after maturity i.e. 15 years. One can extend the account in five-year intervals indefinitely.
If you extend this scheme without investment after the maturity of 15 years, even then you continue to get 7.1% annual interest on your PPF corpus on the closing balance after 15 years. On the other hand, if you extend it with investment, then interest will continue to be added on interest, as it happens before maturity.
If you extend the scheme for 5 years without investment, then you can withdraw any amount once a year. But, if you extend it with investment, then a maximum of 60% of the amount can be withdrawn once a year.
How the PPF 15+5+5 formula works
To understand the PPF 15+5+5 formula, let’s break it down step by step. The formula refers to the investment timeline in the Public Provident Fund (PPF) scheme. Initially, you invest in the scheme for 15 years, which is the mandatory lock-in period. Once this 15-year tenure is completed and the scheme matures, you have the option to extend it in 5-year blocks, as per your preference.
In the case of the 15+5+5 formula, it means the subscriber chooses to extend the scheme twice, each time for a 5-year block, after the initial 15 years. This flexibility allows investors to continue growing their corpus over an extended period.
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PPF: How big a corpus can be created after 15 years
Maximising returns with PPF: A 15-year projection
If you consistently make the maximum permissible deposits in your PPF account every financial year until maturity (15 years), you can accumulate a substantial corpus. Based on the current interest rate of 7.1% per annum, here’s how the numbers add up:
Maximum deposit per financial year: Rs 1.50 lakh
Total deposits over 15 years: Rs 22,50,000
Total fund after 15 years: Rs 40,68,209
PPF scheme extended by 5 years without further investment:
Invested amount (after 15 years): Rs 40,68,209
Estimated returns in 5 years (7.1% p.a. interest): Rs 16,64,377
Total value of investment (after 15+5 years): Rs 57,32,586
PPF scheme extended by another 5 years: Total value of the fund after 25 years
Invested amount (after 20 years): Rs 57,32,586
Estimated returns in 5 years (7.1% p.a. interest): Rs 23,45,304
Total value of investment (after 15+5 years): Rs 80,77,890
Under the 15+5+5 PPF formula, if you invest Rs 1.5 lakh annually for the initial 15 years and then extend the scheme for two additional five-year blocks without making further contributions, your investment continues to grow. With the current interest rate of 7.1% per annum, this strategy can help you build a significant corpus of Rs 80,77,890 over 25 years (15+5+5 years). This showcases the power of compounding and the benefits of extending your PPF tenure for long-term wealth creation.
Turning PPF savings into a monthly pension
Suppose you decide to leave your accumulated corpus in the PPF scheme and withdraw only the annual interest (at the current rate of 7.1%) to meet your expenses. Here’s how much you can expect:
Corpus after 25 years (15+5+5 formula): Rs 80,77,890
Annual interest (7.1%): Rs 5,73,530
Monthly withdrawal (annual interest ÷ 12): Rs 47,794
This setup provides you with a monthly income of approximately Rs 48,000, which you can treat as a pension. By investing Rs 1.5 lakh annually for 15 years and letting the amount grow for another 10 years, you create a steady, inflation-resistant income stream for your post-retirement years.