The interest on your PPF account is compounded annually and credited at the end of the financial year. The calculation is based on the lowest balance in the account between the 5th and the last day of the month.
The power of compounding works best when you start early. The longer your money stays in the PPF account, the more interest it will accumulate. (Image: Financial Express)
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The Public Provident Fund (PPF) is a government-backed savings scheme. At present, the interest rate for the PPF stands at 7.1%, with interest being compounded on an annual basis. The scheme features a mandatory lock-in period of 15 years, although it is possible to extend this period in blocks of 5 years, if necessary.
A significant benefit of the PPF is its tax-saving features. Contributions made to a PPF account qualify for deductions under Section 80C of the Income Tax Act, with a maximum limit of Rs 1.5 lakh per annum. Additionally, both the interest accrued and the maturity amount are exempt from taxation, rendering PPF a fully tax-free investment.
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How PPF Interest Works
The interest on your PPF account is compounded annually and credited at the end of the financial year. The calculation is based on the lowest balance in the account between the 5th and the last day of the month. Therefore, it is advisable to make your PPF contributions before the 5th of every month to maximise your interest.
Doubling Your Investment
Let’s understand with an example how doubling your investment in PPF works in practice. Suppose you decide to invest Rs 10,000 per month in your PPF account, which amounts to Rs 1.2 lakh annually. The current interest rate is 7.1%, and you plan to invest consistently for 15 years. After 15 years, your total investment will amount to approximately Rs 18 lakh. With the current interest rate of 7.1%, the earned interest will be around Rs 13.56 lakh. As a result, your total maturity amount will exceed Rs 31 lakh. Almost double the invested amount and that too tax-free.
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Doubling Your Returns in PPF
1. Start Early
The power of compounding works best when you start early. The longer your money stays in the PPF account, the more interest it will accumulate. If possible, start investing in PPF early in your career to maximize the benefits of compounding.
2. Invest the Maximum Limit
The more you invest for the long-term, the merrier it is.
Adhil Shetty, CEO of Bankbazaar.com, says, “Currently, the maximum you can invest in PPF is Rs 1.5 lakh per annum. If your financial situation allows, try to invest this maximum limit every year to maximise your returns. The higher your contributions, the larger your maturity amount.”
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3. Extend Beyond 15 Years
After the initial 15-year lock-in period, you can extend your PPF account in blocks of 5 years. Extending your account allows your investment to grow even further without additional deposits, as your existing balance will continue to earn interest.
4. Regular Contributions
Make regular contributions to your PPF and avoid withdrawing funds. Doubling your investment is possible with patience. With consistent and long-term investments, you can take full advantage of this tax-free investment option.
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While it may take time, the steady and guaranteed returns from PPF make it a valuable addition to needs like your child’s marriage, education, home buying or other financial goals. For those looking for a safe, tax-efficient way to grow their wealth, PPF remains a great choice.
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