If a PPF account holder uses extension benefit and avails compounding benefit for next 15 years after maturity, then he/she will be able to grow his monthly contribution of Rs 12,000 to Rs 1.09 crore.
New Delhi: Public Provident Fund or PPF is one of the most preferred investment schemes used by risk-averse investors to accumulate a bigger tax-free corpus for their retirement. It also helps you to save tax every year under Section 80C of the Income Tax Act 1961. As it is a government-backed small savings scheme there is no capital risk.
PPF interest rate is decided by the government every quarter. At present, PPF offers 7.1% interest on an annual compounding basis. As per market experts, this interest rate is much higher compared to the rate offered on other guaranteed return products which offer tax benefits also. With this rate one can easily beat inflation and accumulate a larger corpus, that can be used for purposes like your retirement, children’s education/marriage etc. One can invest maximum Rs 1.5 lakh in a PPF account every year.
Although a PPF account matures in 15 years it can be extended by a block of 5 years multiple times. Calculation shows if you invest Rs 12,000 in a PPF account every month for 15 years then at the end of the 15th year, your investment will grow to Rs 39,05480.85. If you don’t withdraw this amount at the end of the 15th year and extend the account for a block of 5 years three times without any contribution (means for the next 15 years), then this corpus will grow to Rs 1.09 crore. Your PPF account will keep on accumulating interest every year for the next 15 years and due to this compounding, your will be able to accumulate a bigger corpus without making any contribution in the last 15 year period.
So if a person starts investing Rs 12,000 in a PPF account at the age of 25 and continues it for the next 15 years till the age of 40 then he can accumulate Rs 39 lakh. And if he extend his PPF account till the age of 55 years without any further contribution, then his investment will grow from Rs 39 lakh to Rs 1.09 crore with the help of compounding.
However, if you decide to contribute the same amount during the extension period as well, then your PPF balance will grow to a massive Rs 1.48 crore at the end of 30 years assuming the present interest rate of 7.10% will continue for the entire 30 years. If interest rates change, the final maturity amount will also change.
Worth mentioning here is that a PPF account can be extended with or without contribution. But you have to mention your choice at the beginning of the extension period. Once you exercise your option it can not be changed within the 5-year block.
