Public Provident Fund (PPF) is one of the most preferred long-term savings scheme as it is not a risky investment; it also offers complete tax-free benefits. For the quarter ending December, the interest on PPF account stands at 8 per cent.
The popular scheme has an initial lock-in period of 15 years but can be extended in block of five years after the maturity period.
A PPF account holder can make a maximum deposit of Rs 1.5 lakh a year. All investments, interest earned and withdrawals under PPF are exempt under (EEE) category, which allows complete tax deduction in investments, interest on accumulated amount and the income you generate at the time of withdrawal.
Account holders should note that the interest on their deposits is calculated on an annual basis – your interest income goes up every year as the account keeps swelling with each yearly or monthly contribution.
Benefits of extending PPF tenure
While many people complain that the initial 15 years of PPF offer lower returns, holding on to it for five more years or more could yield brilliant returns for you.
For instance, if you invest Rs 1 lakh every year at 8 per cent (present rate) interest rate, you will earn Rs 8,000 at the end of the first year; your balance after the first year now stands at Rs 1,08,000.
In the second year, the interest will be calculated on the new PPF balance (Rs 1,08,000 + Rs 1,00,000 = Rs 2,08,000) – eight per cent in the second year increase your interest earning to Rs 16,640, taking the PPF balance to Rs 2,24,480. After 15 years of investing Rs 1 lakh, your total corpus will stand somewhere close to Rs 30 lakh.
While most people go for a withdrawal after 15 years, there are some individuals who decide to extend the account’s tenure.
Interest income increases with time
At the end of 15 years, if you are left with around Rs 30 lakh the interest earned on the balance will increase pretty fast. If you continue to invest Rs 1 lakh annually for five more years at an interest rate of 8 per cent, the earnings from interest in the 16th year will be well over Rs 2 lakh.
In a nutshell, investing Rs 1 lakh for a duration of 15 years earned you a total tax-free amount of about Rs 30 lakh but if you extend the tenure for another five years, you can gain add Rs 20 lakh more to your PPF by the end of five years and you can earn over Rs 30 lakh if you decide to extend the tenure further.
Therefore, if you invest Rs 1.5 lakh (per annum) at an interest rate of 8 per cent for 25 years, you can easily become crorepati.