How to use PPF to save Rs 1 Crore – Be PPF Crorepati

Rs 1 crore is still not a small amount. But whether it is sufficient or not depends on why you actually need it.

So for example, if you were to ask me whether Rs 1 crore is enough for retirement? In most cases, the answer would be a No. Retirement planning is a nasty problem and you can’t just ahead with random numbers for your retirement corpus.

But still, there is a psychological attraction to this figure of Rs 1 crore and becoming a crorepati that us Indians can relate to.

PPF is a beautiful debt product. I have already written about it earlier too (link).

And even though investing in equity is a necessity and highly advisable for the long term, a product like the PPF can still be a part of the overall portfolio. And I am sure the term PPF crorepati in the title would have already captured your interest by now. 🙂

However, PPF is not a short term investment option as it has a lock-in period of 15 years. But still, you can make partial withdrawal after few years. And You can even extend the maturity by a block of 5 years for multiple times. It currently falls under the ‘EEE’ category, which means that PPF contribution, interest earned on PPF and PPF maturity proceeds are exempted from tax.

Interestingly, a few days back I got a mail from a self-confessed conservative investor.

He said that he was slowly increasing his equity investments. But still he felt that he cannot part ways with something as sure-shot and as risk-free as a PPF account. And he wanted to know how long would it take to accumulate Rs 1 crore in PPF?

I felt that this question might interest others as well.

So this post is about finding out:

How to accumulate Rs 1 Crore in PPF (Public Provident Fund)?

And if you are low-risk conservative investor who wishes to accumulate Rs 1 Crore, then PPF is a decent option.

Let me try to answer this from various perspectives:

  • If you contribute Rs 1.5 lac every year for a period of 15 years, your PPF balance will be about Rs 43.9 lac at the end of 15 years (assuming a stable interest rate of 8.0% per annum).
  • If you contribute Rs 1.5 lac every year for a period of 15 years and then don’t liquidate your holding for another 15 years, then your PPF balance will be about Rs 1.39 crore at the end of 30 years (assuming a stable interest rate of 8.0% per annum). You will achieve the target of Rs 1 crore around the 27th year.
  • If you contribute Rs 1.5 lac every year for a period of 15+5+5+5=30 years, then your PPF balance will be about Rs 1.83 crore at the end of 30 years (assuming a stable PPF interest rate of 8.0% per annum). And you will reach Rs 1 crore during the 24th year itself.

But what if you are unable to invest Rs 1.5 lac every year (the full PPF annual limit), then obviously your target of reaching Rs 1 crore in PPF will be delayed accordingly.

Also, if the interest rates go down in years to come, then once again your target of reaching Rs 1 crore in PPF will be delayed to that extent.

So to sum it up, you can become a crorepati if you put Rs 1.5 lac every year in PPF then you can accumulate a corpus of Rs 1.08 crore by the end of the 24th year (assuming that 8% return)

But as you know, neither the PPF limit remains same nor PPF interest rates remain unchanged over the long term.

So let’s try a hypothetical scenario which might actually play out in the near future:

Suppose you begin saving full Rs 1.5 lac in PPF today. Government increases the annual PPF investment limit by Rs 50,000 every 5 years. It is assumed you will continue to invest as much as is needed to fully utilize the annual investment limit of PPF every year. The interest rates also reduce by an average 0.5% every 3 years or so.

What will be the result then?

At the end of 15th year, your total investment of Rs 30 lac would have become about Rs 49.4 lac.

If you continue investing (after extending your PPF account with contribution) for another 5+5+5=15 years, then at the end of 30th year, your total investment of Rs 82.5 lac would have become about Rs 2.02 crore.

Here is the tabular depiction of the excel:

As you might have observed by you, it is only after the initial few years that the actual compounding of the PPF investments becomes visible. And it is for this very reason that you should try not to disturb (withdraw from) your PPF account for as long as possible and try to extend its tenure after the first 15 years lock-in period.

Do you want to try some different scenarios of your own?

You can do so.

You can download this FREE Excel PPF Calculator and play around with inputs. If the previous link doesn’t work, use the link below:

Excel PPF Calculator (2019-20) Free Download

You can even check out historical PPF interest rate and how things have changed in the past when it comes to PPF.

Now, the current limit for PPF is Rs 1.5 lakh per year.

But what if you want to invest more?

Obviously, you need to respect the limit.

But if both husband and wife can contribute to PPF, then things can get fastened a bit.

Save Rs 1 crore Quickly using Husband PPF + Wife PPF

What needs to be done is that a PPF account needs to be opened for both you and your spouse.

Since both the husband and the wife can deposit Rs 1.5 lakh per annum, it means you can contribute Rs 3 lakh every year in PPF. And you will get interest in both these PPF accounts for the entire period of 15 years or more if extended.

So how much do you end up with if both you and spouse contribute Rs 1.5 lakh every year for 15 years?

The answer is Rs 43.9 lakh each, i.e. a total of Rs 87.8 lakh.

So if both of you save diligently, you can achieve Rs 1 Crore in about 17 years. Here is a sample depiction of PPF Husband Wife calculation:

So if you are a conservative investor, who isn’t much interested in volatile investment options, then PPF can be helpful. PPF can help you become a crorepati in a safe way.

  • If you put Rs 1.5 lakh every year in PPF, then you can accumulate a corpus of Rs 1 crore by the end of the 24th year.
  • If both you and your spouse put Rs 1.5 lakh each every year in individual PPFs, then you both accumulate a corpus of Rs 1 crore by the 17th year itself.

And if somehow you manage to continue investing for the 30 years (i.e. 15 years original and 3 extensions of 5 years each), then you will be able to accumulate a really big corpus.

So before I close, let me list down some facts about the PPF for your ready reference:

  • PPF Interest Rate – 8% (check PPF interest rate history)
  • PPF Duration – 15 years
  • Extension of PPF Account – After the maturity period of the original 15 years, it can be extended in blocks of 5 years each multiple times
  • Minimum deposit amount (per year):  Rs 500
  • Maximum deposit amount (per year) :  Rs 1,50,000
  • Number of installments every year: 1 (min) to 12 (max)
  • Number of accounts an individual can open: Only 1. If there is a 2nd PPF account, it is treated as invalid and doesn’t earn any interest.
  • Tax Savings – EEE status, i.e. the annual contribution (up to Rs 1.5 lakh) provides tax benefit under Section 80C. Interest earned and the maturity amount is fully exempted from taxes.
  • Interest on PPF is calculated on the minimum balance in the account between 5th and the last day of each month. So if you invest monthly, then it makes sense to do it before 5th every month.
  • You can further maximize your returns in PPF by investing the full amount at the beginning of the financial year itself. Ofcourse this is not easy for everyone. But if you do so, the full amount earns interest every month of the year.

Here is the link to download the free excel-based PPF Calculator again:

Excel PPF Calculator (2019-20) Free Download

Use the above excel with your own inputs and you can use it as a PPF crorepati calculator.

And before you accuse me of being too gung-ho about PPF, I repeat that equity is the best asset to create long-term wealth. You can become a crorepati by investing in mutual funds too. Here is How much to invest every month in mutual funds to get Rs 1 crore in 20 years.

Also, read how Rs 1 lakh invested every year for 20 years can create a Rs 90+ lakh portfolio without any problem

But let me tell you something.

Investing in equity does come with its own share of ups and downs in the near term. But if you look at the average annual returns of Indian Stock Market, then it will show how you can create some serious wealth from equity. The idea of this post was to tell how a comparatively safe and risk-free savings option like PPF can be used to accumulate a large corpus of PPF Rs 1 crore.

For most people, its advisable to have a balance between equity and debt when investing for long.

But if you aren’t sure whether you are saving and investing properly, do get in touch with an investment advisor soon (how?).

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Even after Rate Cuts, PPF is good for your Long Term Goals

PPF rates have been cut from 8.0% to 7.9% (in April 2017).

And as far as historical PPF rates are concerned, this is the first time that rates have dipped below 8% – sadly, the psychological risk-free rate barrier for many.

PPF Rate History upto 2017

Many people are now questioning the suitability of PPF as an investment product. Doubts over PPF are further fueled by good returns given by equity in recent past. Many equity funds have given 20-30% returns in last one year. So people are bound to ask questions.

But really… is it time to write off the PPF?

No. Ofcourse not!

Those who think that – are the ones who don’t understand a lot of things.

PPF remains a great choice in debt space for most people.

Even if you were to plainly see the 0.1% cut in PPF rates, it only translates into a difference of just Rs 150 on a full Rs 1.5 lac annual limit. 🙂 So its not that world of PPF is crashing with this 0.1% cut.

PPF – Still a Good Option

A tax-free return of 7.9% is quite reasonable in falling interest rate scenario where inflation too is within control.

Also, it makes sense to compare PPF returns with returns offered by comparable debt investments today. Only comparing it with its own past high returns won’t help you make investment decisions today.

The safety it offers and the EEE taxation status (where investments, interest income and maturity amounts are tax-free), it’s no doubt a beautiful product.

But like any other financial product, even PPF should be relevant for your financial goals. (read about goal based investing to better understand relevancy of different products for different financial goals)

PPF can easily form the bedrock* of a long-term (goal) portfolio’s debt part. And retirement is one such long-term goal. Though for young people, an intelligent asset allocation would be skewed more towards equity (for growth) than debt (for stability), PPF can still be the stabilizing factor of an equity-heavy portfolio.

*PPF’s role may be lesser if you are already investing in EPF or VPF.

And since we are talking about the recent rate cuts, its also true that no one can be sure that rates will never rise again. The possibility of rate falling more in future is no doubt high. But when rate cycle turns around, products like PPF will stand to benefit.

Download Excel-based PPF Calculator (2019) here

Don’t Compare PPF with Equity. Both are Necessary.

As I said earlier, many people are having doubts about PPF when equity MFs and ELSS schemes are giving good returns.

Infact, when tax season comes, you can find truckloads of people getting into which is better ELSS vs PPF kind of debates. And honestly, such debates are useless.

Equity has given higher returns than PPF in recent past. But does it mean you should be in equity 100%? The answer is ‘No’.

Equity returns are volatile. It can give stellar returns one year and bury you underground the very next year. Many people make the mistake of assuming that good returns of recent past will continue forever. It has never happened. It will never happen. At times, equity will perform better than debt products like PPF. And at times, PPF will do better than equity. You can see it for yourself. Here is the historical comparison of last 10 years:

PPF Vs Equity Stocks

A product like PPF, which offers guaranteed steady returns – can be a good hedge for fluctuations in the other parts of your portfolio.

But every goal requires proper asset allocation between equity and debt. Its not Equity Vs PPF kind of question. Rather, its ‘how much equity’ and ‘how much debt’ question (popularly referred to as – deciding the asset allocation).

Both assets have their own purpose in the portfolio. Equity is for growth and debt (PPF kinds) is for providing stability.

Balance is necessary. And the exact balance might be different for different goals and different people.

Sidenote About EPF and VPF

The basic idea behind any provident fund (be it PPF, EPF or VPF) is to help individuals save money for their retirements. In that respect, EPF (+VPF) too is a decent option but only available for salaried individuals. So if the interest rate offered by VPF is higher than PPF, then it makes sense to invest more in VPF rather than PPF. As for those outside EPF coverage, PPF is the only option.

But there are a few other things to make note of here.

PPF has a lock-in of 15 years (though partial withdrawals are allowed), whereas VPF (alongwith EPF) can be withdrawn when you switch or quit jobs (though taxable if 5 years not completed). Liquidity wise, EPF wins. But this flexibility comes in way of real wealth creation. People withdraw money from EPF+VPF while switching jobs and use it for non-essential expenses. This breaks compounding and eventually, that hurts the final corpus size. So you don’t get as rich as you could have. 🙂

What to do Then?

Now what I say next is very important.

Given its 15 year lock-in and restrictions on partial withdrawals, PPF is obviously best suited for long term goals. And you also know that PPF is a pure debt product.

But there is another thing that we know – that for long term goals, equity is the best option. Isn’t it? After all, historical records clearly prove that equity has beaten all other asset classes when it comes to long-term returns.

So what to do then?

The answer is that you need to be clear about your financial goals first. Really. This might sound too text-bookish or unimportant, but you really need to be clear about your financial goals. Also, you need to know how far away the goals are in future.

If it’s a long-term goal like retirement and atleast 15-20 years away, then you need to be intelligent about your asset allocation.

100% equity or 100% debt is a big no-no. Maybe, investing 70-80% in equity and 20-30% in debt is the way to go for such goals. And for debt, your PPF (and EPF) can be a good choice (and PPF can be used to save up a lot of money if you know how to – Read this detailed article on How to save Rs 1 crore using PPF and become a PPF crorepati). You can also go for debt funds but remember that returns are not guaranteed there (though still reliable enough).

For shorter-term goals, investments should be more in debt. For example – a goal that is 3 to 5 years away might demand 20-40% in equity and 60-80% in debt. The exact percentage might differ depending on the individual’s risk appetite, goal criticality and other factors. But PPF is not suitable for such short-term goals due to its restrictions. RD / FD / Debt funds might be better choices for such goals.

Debt funds can also be considered when someone is nearing retirement and wants to slowly reduce equity exposure. This is when a long-term goal is turning into a short term one.

Final Words

Now everyone’s financial situation is different and hence, advice might differ. But generally speaking, one should have higher equity exposure for long-term goals and higher debt exposure for short-term goals.

Talking specifically of long-term goals, PPF is a good choice* for debt component of your goal portfolio. People don’t like its liquidity restrictions but that is exactly what helps bring in necessary discipline when saving for such goals. But having said that, debt (or PPF) alone will not be enough for long term goals like retirement. These are best served by higher equity allocation.

*Ofcourse only upto Rs 1.5 lac (for investing more in debt, you need to look at debt funds / bonds / deposits / etc.).

So don’t worry too much about the recent rate cuts of PPF. It might go down even lower in near future. Focus instead on – identifying your goals, finding the correct asset allocation for each goal(s) and then, investing as per each goal’s requirement. As for PPF, it still is an excellent debt investment for your long-term goals.

PPF Interest Rate History & What You Should Really Know

(Updated July 2019) – Currently, PPF rates are 7.9% (from Jul-2019 onwards)

History of PPF interest rates is not very exciting. The changes have been very rare till recently (before the government decided to go in for quarterly revisions of PPF rates).

But in spite of all the noise about other assets, Provident Funds remain the preferred mode of investments for most Indians.

PPF interest rate history

PPF (Public Provident Fund) continues to be looked at as a solid product to create a large corpus over time, with the added benefit of tax savings. As of now, PPF falls under Exempt-Exempt-Exempt (EEE) tax regime. This means that:

  • 1st E – Investment in PPF account up to Rs 1.5 lac per year is eligible for deduction.
  • 2nd E – Interest earned is tax exempted.
  • 3rd E – Maturity amount is also exempt from tax.

Though this EEE treatment of PPF might change in the near future. We will discuss that later in the post.

As of now (since July 2019), the rate of interest on PPF is 7.9% per annum. Read about whether investing in PPF after recent rate cuts make sense or not.

PPF Interest Rate History (Last 33+ years)

This history of PPF interest rate in the last 30 years has been as follows:

  • PPF Interest Rate 1986 to Jan-2000 – 12.0%
  • PPF Interest Rate Jan-2000 to Feb-2001 – 11.0%
  • PPF Interest Rate Mar-2001 to Feb-2002 – 9.5%
  • PPF Interest Rate Mar-2002 to Feb-2003 – 9.0%
  • PPF Interest Rate Mar-2003 to Nov-2011 – 8.0%
  • PPF Interest Rate Dec-2011 to Mar-2012 – 8.6%
  • PPF Interest Rate 2012-13 – 8.8%
  • PPF Interest Rate 2013-14 – 8.7%
  • PPF Interest Rate 2014-15 – 8.7%
  • PPF Interest Rate 2015-16 – 8.7%
  • PPF Interest Rate 2016-17 (1st April 2016 – 30th September 2016) – 8.1%
  • PPF Interest Rate 2016-17 (1st October 2016 – 31st March 2017) – 8.0%
  • PPF Interest Rate 2017-18 (1st April 2017 – 30th June 2017) – 7.9%
  • PPF Interest Rate 2017-18 (1st July 2017 – 31st Dec 2017) – 7.8%
  • PPF Interest Rate 2017-18 (1st Jan 2018 – 30th September 2018) – 7.6%
  • PPF Interest Rate 2018-19 (1st Oct 2018 – 30th June 2019) – 8.0%
  • PPF Interest Rate 2019-20 (Currently – 1st July 2019 onwards) – 7.9%

Or, graphically speaking:

 

PPF Interest Rate History 2018 2019 India

As evident from the graph above, the change in rates have been rare:

  • Rates were fixed at 12% between 1986 and 2000 (sounds like heaven) 🙂
  • Then between 2000 and 2003, the rates slid down to 8%
  • The rates then remained stable at 8% till 2011
  • Rates were then revised to 8.6%, 8.8%, and 8.7%.
  • Last few years saw rates come down to 8.1%, 8.0%, 7.9%, 7.8% and then a historic low of 7.6%.
  • Rates finally saw an uptick of 8.0%. Again now down to 7.9%.

Now the quarterly revision of rates is allowed.

The PPF interest calculation continues to be done on a monthly basis – on the lowest balance between the 5th day and end of the month. But the interest is credited only at the end of the year. So as far as compounding is concerned, it takes place on an annual basis.

By the way, a little too much importance is given to investing in PPF before the 5th of the month instead of after 5th. But it hardly matters… so relax.

How will PPF Interest Rates be changed now?

PPF is part of the government’s small saving schemes portfolio. So the question who decides PPF interest rate has an obvious answer. 🙂

Earlier, the rates were considered for revision once every year.

But with effect from 1st April 2016, the rates for schemes like PPF, etc. are to be considered for revision every quarter, based on previous quarter’s yield on benchmark government securities (or bonds of corresponding maturities) with a small markup (around 0.25%).

So if yields go down, the PPF rates should go down a few months after that. (and there will be a hue and cry about why the government is not investor-friendly)

If yields go up, the PPF rates should go up a few months after that (and people will cheer as they will benefit from a turnaround in the rate cycle).

But why is it that the government decided to switch from annual to the quarterly revision of rates? Is the government worried about something? Why is it that it wants to bring the rates as close to that of benchmark government securities?

The answer is and I quote from this article:

…according to a report in 2011 by Shyamala Gopinath committee (which was set up to review National Small Savings Fund, or NSSF), such a fixed rate regime caused a lot of volatility in collections.

When market rates declined, small savings collections went up as their rates remained unchanged. The opposite happened when market rates went up. This leads to a situation where when market rates are low, states are loaded with high-cost NSSF loans, and when market rates are high, NSSF loans as a source of financing fixed deposits dries up completely. It is therefore, very essential to align these rates with market rates.

In December 2011, acting on the recommendations of the report, the government made returns on small savings schemes market-linked. Rates on these products were benchmarked to government securities (G-secs) of similar maturity periods with a positive spread of 25 basis points.

Now interestingly, banks are affected by changes in the interest rates of these small savings products.

Why?

Because the banks’ own saving products compete with government’s small savings products.

So having a positive markup on PPF, etc. made these products more suitable for customers looking for higher rates and in turn, put a lot of pressure on the banks. So banks have good reason to push for the reduction in rates offered by government products. This is the reason why banks have been lobbying (for years) to get this done. They cannot reduce rates on deposits as that would mean losing out to competition from schemes like PPF (and other short-duration government products)

The New Risk?

Earlier, rates were revised once every year. But now, the revision will take place every quarter.

So there is obviously an increase in interest rate risk as far as PPF is concerned. So in a falling rate scenario and for someone who has a large PPF balance, it can hurt a lot.

But when you compare the current rate with inflation numbers (around 5% to 6%), it still seems to be satisfactory. Isn’t it? After all, inflation of 6% and PPF with a tax-free rate of 7.8% will offer you a real rate of about 2% if not more. And that should work.

But we are missing one very important point – inflation rates published by government and RBI are not exactly equal to our own inflation. 😉

You spend on products that are facing higher price hikes. So your personal inflation might be 10% and not what RBI tells you.

So it’s possible that even with about 8% given by PPF, you are not getting any real returns.

You might feel that if that is the case, why not go for products that are known to given higher average returns (ofcourse with short-term volatility) like equity mutual funds and invest regularly via SIP.

But simply comparing returns of PPF and ELSS Mutual Funds is not correct. PPF is a part of your debt portfolio and equity MFs that of the equity portion of your portfolio. Both parts have their own significance. I will come to this point in a bit…

Now there is another (future) risk in products like PPF.

Future of PPF?

No. I am not questioning the safety of PPF in the future. It is run by the Government of India and hence it is (default) risk-free and extremely safe to invest in – no doubt.

But what about other kinds of risks? What if in future, the PPF is taxed? It almost happened this year for EPF before it was rolled back. But EEE status turning into EET is possible (eventually).

Another risk can be that withdrawal might have certain riders. Say you can’t withdraw the full amount on maturity. Or something similar. After all, the government is getting this large amount of money every year at a relatively low cost (currently 7.9%). So the government will want to reduce this rate and ‘try’ to keep money from going out. That is common sense and that is a future risk for young people like us.

So when you think that the PPF is risk-free, remember that primarily, it is the default risk that you are talking about. Other risks (known and unknown) still remain.

Now don’t think that I am against PPF as a product. It is an awesome product! It should definitely be part of one’s portfolio. But…

PPF is good. But not enough.

Previous generation’s automatic choice of investment was Provident Fund (PPF/EPF/VPF).

Why?

  • The contributions were (and is) eligible for deduction.
  • The returns were decent (12% till the year 2000 – imagine that 🙂 ).
  • And even the maturity amount is tax-free!

What else do you want in this world? 😉

But let us for a moment think about one thing:

PPF account has a maturity period of 15 years. So it is ideally created for goals that are atleast 15 years away.

Now due to the risk-free nature of the product, the returns given by PPF would ideally be less than those given by riskier assets. Isn’t it?

Also, you and I understand that when investing for long-term goals, we can and should invest more in assets that give higher returns in spite of being volatile?

Why? Because average returns are higher when longer periods are considered.

So if we are investing for goals that are due in long-term (i.e. 15 years) like say retirement, etc., shouldn’t we be investing in an asset that gives better returns?

I think we should. If not fully then atleast a major chunk of our investments. Short-term volatility should not be an excuse for avoiding an asset, which gives higher long-term returns.

PPF is a wonderful instrument. It gives me peace of mind as returns don’t fluctuate like stocks or equity MFs.

Use this Excel-based PPF calculator to see how much you can accumulate using PPF alone (or read this detailed article on How to save Rs 1 crore using PPF and become a PPF crorepati).

But if you and I are able to stomach some of these short-term fluctuations, then we should have a higher exposure to equity as it provides higher long-term returns – which is necessary to build a healthy corpus. And also because in the long run, equity has a better potential of beating inflation and creating wealth.

I know when the topic of PPF comes up, it also brings up the topic of tax savings. And with that, comes the PPF vs ELSS debate and questions like whether to invest in PPF or ELSS or both? But that is a detailed discussion in itself. So let’s leave it for some other day.

I personally invest a lot more in equity MFs, direct equities than in PPF. So you can take that as a disclosure. 🙂

PPF (or EPF) should definitely be a part of your portfolio and you are right in regularly keeping track of PPF interest rates. 🙂 But investments should be made as per the goal requirements, the suitability of asset allocation and not just because of tax considerations.