Public Provident Fund (PPF) interest rate is compounded annually. You can calculate the Future Value of your investment online, with a financial calculator or, on MS Excel.
Public Provident Fund for retirement: The key to retirement planning is starting early. But, how early should one start? The answer to this question depends on various factors, including your present financial condition, preferences in life, employment status, ability to manage money efficiently etc. Some may prefer not to think about retirement in early years of their career. Some may start, right after getting the first job. One thing is certain that taking an early step to save and invest for retirement has multiple benefits, including the monetary one. Wondering, how? Here’s an explainer. But first, let us make a few assumptions:
1. A person starts investing in Public Provident Fund (PPF) just after landing the first job at the age of 25. The maximum amount he/she can invest in PPF in a Financial Year is Rs 1.5 lakh. Consider the person has decided to invest Rs 1.5 lakh per year in PPF throughout his/her career till the age of retirement at 60.
2. Assume that the interest rate on PPF remains 7.9 percent throughout the tenure of the investment.
Before we move to the calculation part, here are a few facts you should be aware of: In the last five years, the average rate of return on PPF has been around 8 per cent. The government revises the PPF interest rate on a quarterly basis. Recently, the government decided not to cut, or increase, PPF interest rate from the previous 7.9 per cent.
The PPF account matures at the age of 15. But it can be extended further in blocks of five years each.
Calculation: PPF interest rate is compounded annually. You can calculate the Future Value of your investment online, with a financial calculator or, on MS Excel. The calculation shows that at 7.9 per cent interest, investment of Rs 1.5 lakh can grow up to around Rs 2.9 crore in 35 years. The final amount may go up or down depending on the overall interest rate during the entire investment period. Here, it is important to note that this retirement corpus will be in addition to the money you will accumulate through Employee Provident Fund (EPF).
PPF investment comes with EEE benefits. That is, the invested amount is not taxed under Section 80C of Income Tax Act. The maximum investment limit for Section 80C is Rs 1.5 lakh per year. The interest earned and the amount withdrawn on maturity from PPF are also not taxed. Since the scheme is directly monitored by the government, there is a rare possibility of default.
If planning for retirement, you can also invest in National Pension System (NPS), or Mutual Funds after doing a thorough research or taking guidance of a trusted financial advisor.