Public Provident Fund: Trick you can use to increase your maturity value by 300% in 10 years!

Public Provident Fund is India’s one of the preferred way of Tax Saving. PPF not only help in saving taxes but also earning above inflation returns over long term. PPF have sovereign guarantee i.e. the money is fully backed by the Govt of India.

National Savings Organisation introduced the Public Provident Fund (PPF) in the year 1968. This scheme offers investors the opportunity to invest in a scheme that offers decent returns as well as tax exemptions. The latter means that the PPF account holder can enjoy tax-free contribution of up to Rs.1.5 lakh (per financial year), interest earnings, and maturity proceeds from the scheme as per the Income Tax Act, 1961.

Current interest rate on PPF is 8% pa which is compounded annually.

The lock-in period of a PPF account is 15 years. Hence most investor withdraws money after this lock-in period. But little is known that you can choose to extend the tenure in blocks of 5 years. One or more such block can be asked by investors. Now extension this doesn’t sound exciting, but you would be surprised to know that by simply extending your account for just two blocks of five years each, the final amount could be over almost three times of the original maturity proceeding.

Now let’s see this with example.

First, lets see normal PPF account with yearly investment of 150000 pa for 15 years.

If you start PPF account with maximum allowed investment of Rs 150000, then with 8% you will earn Rs 12000. Next year the principle amount becomes (150000 + 12000 + 150000 = 312000). If this is continued for 15 years then by end of lock-in period you will earn more than Rs 21 lakhs by way of interest. This is possible because of power of compounding. The total maturity value would be Rs 43.9 Lakhs. Please note all this calculations are done using 8% rate of interest which is current rate for PPF.

Most investors would be happy to take this money. However what if they allow power of compounding to wield its magic further.

As can be seen in table above, if an investor extend the investment period by 10 more years, his maturity amount would grow to almost Rs 1.18 Crores. This is a big amount and will definitely act as a source of pension for post retirement years.  So we strongly advise to continue investing PPF even after the mandatory lock-in period to take full advantage of this Tax efficient investment avenue.

Note if investor wish to extend the investment period then same has to be intimated in writing by filing up the Form H. If one keeps depositing without furnishing this Form, then all new deposits will be treated as irregular. Neither interest will be paid nor the benefit of Section 80C of will apply to these deposits.

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