PPF Formula: In today’s world, everyone wants to protect their hard-earned money and continue wealth creation. Many people invest in the stock market or mutual funds for this reason. While these market-based investments do offer some returns, they also carry significant risk. It is not always necessary for every investor to invest with risk. There are many investors who are risk-averse but still hope for high returns, and for them, PPF is a very safe investment option. Yes, we’re talking about the Public Provident Fund. It’s a long-term investment option that ensures safe investment, locks in the funds until maturity, and the investment amount, interest earned, and maturity returns are tax-free.
PPF Formula: A Smart Investment Option with no Risk and Triple Tax Benefit
But a question that comes to everyone’s mind is whether government investments can make us millionaires. Yes, because the interest on government investments is very low. But did you know that smart investments in government instruments can easily make you a millionaire? Many people think that PPF is merely a small savings account where money accumulates gradually, but this is completely wrong. If PPF is managed strategically, you can earn crores of rupees from this fund, where your money earns for you, just like the stock market. Today, we’re going to discuss one such formula: the 15+5+5 formula.
Let’s first Understand what PPF is
PPF, or Public Provident Fund, is a long-term savings scheme of the Government of India. Investments can be made in it from a minimum of ₹500 per year to a maximum of ₹1.5 lakh. You can invest in it in small amounts every month or make a lump sum annually. This account is opened for 15 years, and after 15 years, it can be extended for another 5 years.
Although the current interest rate on PPF is 7.01%, the government changes its interest rate every three months. This interest is compounded, meaning interest is earned again on the principal and interest. This demonstrates the power of compounding interest in PPF. The most important feature of PPF is that it falls under the exempt-exempt-exempt category. This means exemption on investment, exemption on interest, and exemption on maturity amount. Considering all these benefits of PPF, if you adopt this 15 + 5 + 5 formula, you can definitely convert an investment of lakhs of rupees into crores.
Now let us learn what 15+5+5 formula is and how to Apply it?
In the 15 + 5 + 5 formula, 15 years is the period for which you start investing in PPF. This means you have to open a PPF account for 15 years. The maximum investment you make in this account becomes a corpus fund in 15 years. After 15 years, you can extend it for another 5 years or stop investing if you wish. However, if you want to take advantage of the formula, after the corpus fund is formed in 15 years, take a 5-year extension first so that you can earn interest on your corpus fund. After this, taking another 5-year extension means you can earn interest again on the principal and interest earned over the last 20 years, without investing anything. Thus, these 25 years provide you with a substantial amount of return.
Let’s understand this with an Example
Suppose an individual invested ₹1.5 lakh annually in a PPF account and received an average interest rate of 7.01%, the investment for the first 15 years would amount to ₹2.2 million (₹50,000). Based on 7.01% interest per annum, the estimated maturity after 15 years would be ₹40 to 41 lakh. If the individual withdrew this amount after 15 years, they would have a corpus fund of ₹40 lakh.
If the investor continued the investment for another 5 years instead of stopping, the investment amount would grow to ₹58 lakh by 20 years, without any further investment. However, if the investor wishes to withdraw ₹58 lakh at this stage, the amount would reach ₹81 lakh after 25 years. However, if investors continue investing throughout this process after 15 years, i.e., investing ₹1.5 lakh every year for 25 years, this amount grows rapidly, and after 25 years, the corpus fund accumulates over ₹1 crore.
Facts to keep in mind when Investing in PPF
- For readers’ information, the government changes the interest rate on PPF every quarter.
- Therefore, it is possible that in the future, the government may increase the interest rate due to inflation.
- Even if an individual stops investing in this scheme during the extension period, the investor continues to receive compound interest.
- Before starting an investment in this scheme, it is important to know that PF funds cannot be withdrawn easily, especially since liquidity is not possible for the first 7 years.
- However, if you choose other investment options after 15 years, such as mutual funds or the stock market, instead of PPF, these options can also be beneficial for you.
- It’s important to note that inflation will increase significantly after 25 years, so a sum that appears large today may prove to be insignificant after 25 years.
Tax and Other Benefits of PPF
- The PPF scheme offers tax exemption on deposits, tax exemption on interest, and tax-free maturity.
- This allows you to continue receiving tax exemption throughout the lock-in period.
- Furthermore, the investment is locked in, meaning your money is tied up for the long term, allowing you to directly benefit from the power of compounding interest.
- The biggest advantage of this scheme is that it is completely risk-free, as it is a government-backed scheme.
Conclusion – PPF Formula
Overall, if you want to invest in PPF and follow the 15 + 5 + 5 formula, it provides excellent returns. However, you need to keep in mind that this will be a long-term investment with zero liquidity, minimal risk, substantial tax savings and a substantial corpus accumulated over a long period.