The power of compound interest in Public Provident Fund (PPF) account

The Public Provident Fund Scheme is a tax free savings scheme for individual persons started in 1968. There have been some amendments till date.

The key features are:

1. The amount you can invest per year is Rs. 1,00,000.( update July 2014: now you can invest Rs. 1,50,000 per year)
2. The interest rate is 8.6%( 2013), and cary vary.
3. The money can be taken out only after 15 years. You can continue the scheme indefinitely thereafter for period of 5 years at a time.
4. You can withdraw some amount after 5 years
5. You can take a loan after some time. The interest rate for the loan is 2%.
6. Any Indian resident citizen can open it for themselves if they are older than 18 years. Either the father or mother can open a PPF account for their children less than 18 years old.
7. A NRI cannot open PPF, but can continue his PPF for the first 15 years, if it was opened before he became a NRI. The funds are non-repatriable in such a case
8. All the interest and capital gain is tax free.

The features are well elaborated here and here

It is a wonderful and safe instrument for each person, although inflation could bite into the real returns.

Let us see how the power of compounding works in PPF.

Say someone starts investing 1,00,000 per year from the age of 18 to 60

We can plug in the figures into this calculator available online.

We get the following results:

Amount invested: 43,00,000

Amount obtained: 4,23,16,667- almost 4 and a quarter crores from a total investment of 43,00,000.

It is a decent return. You can get higher returns on property and shares, but this is hard cash without any risk at all. If one has money to spare, one should definitely think of investing it as part of their retirement plan.


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