Plan Your PPF Investment for Regular Income: Public Provident Fund (PPF) is quite popular among small savings schemes for a number of reasons. This is primarily because PPF, also known as ‘15-year PPF’, offers a dual benefit in the sense that it not only provides guaranteed returns but also offers tax benefits. Currently, PPF yields interest at 7.1 per cent with yearly compounding.
One can invest in a PPF account for a minimum of 15 years and avail any number of 5-year extensions subsequently to avail tax benefits of up to Rs 1.5 lakh a financial year under Section 80C of the Income Tax Act and earn a tax-free amount on maturity.
In this article, let’s take a look at a scenario where an investor can park their funds wisely over the years to generate an income of Rs 6.73 per year, which is about Rs 56,060 per month, in 24 years using PPF.
PPF Lock-in Period | How Many Extensions Can You Opt for After the Initial 15 Years?
First things first, let’s take a look at the minimum lock-in period, which can be followed by 5-year extensions. During the extension period, if the investor chooses to continue contributing, they are allowed to make yearly withdrawals subject to certain conditions.
Deposits into a PPF account must be made at least once every year for the first 15 years as well as during the extensions to be able to earn yearly income during the extended period. Remember, after the initial lock-in pod of 15 years, the account can be extended any number of times in batches of 5 years.
Contributions to PPF are eligible for deduction in taxable income under tax laws (old regime), subject to the total limit of Rs 1.5 lakh a financial year under Section 80C of the Income Tax Act.
Remember, the interest earned as well as the corpus are also tax-free in PPF.
Public Provident Fund Explained | So, to Achieve Your PPF Goal, Your First Task is to Complete Your 15-year Maturity Period
At the end of the 15-year period, the maturity amount will be approximately Rs 40.68 lakh, including a principal of Rs 22.5 lakh and interest of Rs 18.18 lakh, calculations show.
Currently, PPF offers an interest rate of 7.1 per cent, compounded annually.
Now, How Many Extensions Will You Need to Reach Your Goal?
First, let’s start with one extension of 5 years and see where your corpus reaches. By continuing your yearly contribution of Rs 1.5 lakh, at the end of the first extension of 5 years, your maturity amount will be approximately Rs 66.58 lakh with a principal of Rs 30 lakh and interest of about Rs 36.58 lakh, calculations show.
At the end of the 25-year period (the original lock-in of 15 years followed by 2 back-to-back extensions of 5 years each), your corpus will reach approximately Rs 1.03 crore with a principal of Rs 37.5 lakh and interest of Rs 65.38 lakh, calculations show.
By the end of 24 years, you will be able to reap the benefits of your investment the way you planned.
At the end of 24 years, your PPF maturity amount will have reached approximately Rs 94.75 lakh, with a principal of Rs 36 lakh and interest of about Rs 58.75 lakh, calculations show.
At this stage, you can start withdrawing the interest on the entire corpus once a year subject to certain conditions.
In 24 years, your total corpus will be about Rs 94.75 lakh, calculations show. If you withdraw the interest annually starting at this stage, you will get Rs 6.73 lakh a year, which comes to about Rs 50,060 a month.
This way, you can plan your PPF extensions wisely to earn the desired regular income.
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