New Delhi: The Employees’ Provident Fund (EPF) and the Public Provident Fund (PPF) were launched 16 years ago and have since quickly climbed to the top of the financial popularity charts in the last century, which substantially continues to this day. However, the entire attraction of the PPF is to generate long-term wealth coupled with tax exemption and a very high degree of security.
Recently, however, some investment strategists have pointed out that this popular instrument can be used as a tool that can generate annual income almost like a pension scheme.
Which rules enable PPF to operate like pension scheme
Let’s see how. There are a couple of rules that make the step appear fairly simple and amenable to back-of-the-envelope arithmetic. The first one concerns the extension of PPF beyond the initial 15 years which almost everyone is familiar with. It allows one to continue investment in the account in blocks of 5 years after the expiry of 15 years. In other words, one can invest for 15, 20, 25, 25, 30, 35, 40 years or beyond.
The immediate corollary is if one makes a substantial investment every year and the corpus keeps accumulating at 7 per cent plus for such a long term, one ends up creating a sizeable corpus. For the sake of keeping our calculation simple, suppose one has Rs 1 crore in the PPF account.
What is the withdrawal rule
Now consider the enabling rule of PPF. Any subscriber can withdraw partial funds from the account once a year which falls into the 5-year extension periods. However, there is a rider – one cannot make withdrawals which, in a block of 5 years, would surpass 60 per cent of the balance amount in the account.
The rule states, “In the event of a subscriber opting to subscribe for the aforesaid block period he shall be eligible to make partial withdrawals not exceeding 1 every year by applying to the Accounts Office in Form C, or as near thereto as possible, subject to the condition that the total of the withdrawals, during the 5 year block period, shall not exceed 60 per cent of the balance at his credit at the commencement of the said period.”
How to calculate PPF returns
If you have Rs 1 crore in the PPF account, it would earn you an interest of Rs 7.1 lakh a year, since the rate of interest is 7.1 per cent.
Any subscriber can take out this amount at one go and yet maintain the original sum in the account ie, at Rs 1 crore.
Rs 7.1 lakh a year makes it Rs 59,166 a month, which is not a small sum as an element of regular expenditure.
How to create Rs 1 crore wealth using PPF
To have Rs 1 crore in your PPF account you need to invest Rs 1 lakh for every year, assuming that the interest rate remains at the current 7.1 per cent. If you are more generous and put in Rs 1.25 lakh a year, you can reach the Rs 1 crore mark in 27 years.
You can reach Rs 1 crore in 25 years if you could invest Rs 1.5 lakh every year. By the way, you can invest a maximum of Rs 1.5 lakh in your PPF account and get tax exemption on it, according to section 80C of the Income Tax Act 1961. The PPF is mandated by the Government of India.
PPF is usually used for long-term asset creation and tax exemption. However, in certain circumstances, it could be used to generate cash regularly almost like a pension fund. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
