Power of Rs 1,50,000 PPF Investment: Public Provident Fund (PPF) is one of the few schemes that generate a tax-free retirement corpus. Such a corpus may help one generate a tax-free passive income for decades. After drawing such an income, the principal will remain as it is.
Not only does it have minimal investment risk, but PPF can also provide diversification in the form of debt to an investor.
If one begins their PPF investment early in their life, they may generate a significant retirement corpus and an effective tool for long-term passive income.
In this write-up, we will tell you how, by investing Rs 1.5 lakh/year in PPF, you may create a Rs 2.27 crore tax-free retirement corpus by 60 years of age, and how, from the same corpus, you may draw an estimated Rs 1.35 lakh/month income for many decades.
How and where to open PPF account?
One may open a PPF account in a bank or a post office. In a post office, a single adult or a guardian on behalf of a minor/person of unsound mind can open the account.
Minimum, maximum PPF investment
One can open an PPF account with a minimum Rs 500 investment.
One needs to deposit the same amount in a financial year to continue their PPF account.
Or else, it will turn dormant.
The maximum PPF deposit in a financial year is Rs 1,50,000.
The amount can be deposited one time or in instalments.
PPF interest rate/income tax benefits
PPF account holders get a fixed interest of 7.1 per cent at banks and post offices.
PPF is an exempt-exempt-exempt scheme, where deposits up to Rs 1.50 lakh a financial year provide tax benefits in the old tax regime.
The interest earned and the corpus generated are also tax-free.
PPF account maturity/extension
The PPF account maturity period is 15 years. After 15 years, the account holder may withdraw the entire amount, or they may extend it for 5 years.
On the account extension, they have two options—
- They can keep investing, or they may stop. In either case, they will get the interest.
- If they keep investing, they may take unlimited extensions of 5 years each.
- If they invest, they may withdraw up to 60 per cent corpus in a single withdrawal in a financial year. The amount will be the balance credit at the time of maturity in the block of 5 years.
- If the investor stops investing, they can take only 1 extension. However, in that 5-year period, they may withdraw any amount.
How to build Rs 2.37 crore tax-free retirement corpus
We are taking the example of a person who is starting their PPF investment journey at 25 years of age.
They need to invest Rs 1.50 lakh at the start of every financial year till 40 years of age.
Then take 4 extensions of 5 years each and keep investing the same amount at the beginning of each financial year.
By the time they turn 60, the estimated corpus they may generate will be Rs 2.27 crore.
The total investment in those 35 years will be Rs 52,50,000, the estimated interest will be Rs 1,74,47,857, and the estimated corpus will be Rs 2,26,97,857.
How to get Rs 1,35,000/month tax-free income
One may need to keep taking extensions of 5 years each and keep depositing Rs 500 a financial year to continue your PPF account.
During extensions, if they withdraw just the interest amount from the PPF retirement corpus, it will be an estimated Rs 16,11,548 a year or an estimated Rs 1,34,296 a month.
They may withdraw this amount for any number of years, and their retirement corpus of over Rs 2.27 crore will remain as it. They may withdraw that in phases or pass on to the next generation.
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)