PPF rates to come up for revision tmrw: Know how it can be used as a pension fund

Kolkata: The Centre can revise the interest rates on PPF (Public Provident Fund) at the beginning of every quarter, if it wants. Accordingly, the interest rates for PPF, as indeed of other small savings schemes at the Post Office, will come up for revision on Dec 31. If there is no change in the PPF rate, the existing annual rate of 7.1% will apply for the January-March 2026 quarter.

PPF is one of the instruments of long-term asset creation and tax exemption, which were launched in the era of controlled economy. Introduced in 1968, this scheme has survived the transition to a market economy and continues to be popular with millions of investors, who want to put a part of their funds in a guaranteed-return instrument. The most interesting thing to know about in circumstances, it could be used to generate cash regularly almost like a pension fund.

Significantly, there are a couple of rules that enable PPF to he used as a pension fund. But the point is the withdrawals take place from the accumulated funds in PPF and the more the amount, the higher the possibility of withdrawal. Therefore let's do a back-of-the-envelope arithmetic to watch how it can happen. The first rule that enables the creation of a significant amount is the extension of PPF beyond the initial 15 years. It allows one to continue investment period in PPF by blocks of 5 years after the expiry of initial 15 years. In other words, one can invest for 15, 20, 25, 25, 30, 35, 40 years or beyond.

The corollary: if one makes a substantial investment every year and the corpus keeps accumulating at 7.1% for such a long term, one ends up creating a sizeable corpus. For the sake of keeping our calculation simple, suppose an individual has Rs 1 crore in his/her PPF account.

Now consider the enabling rule of PPF to make regular withdrawals without closing the account. Any subscriber can withdraw funds from a PPF account once a year. However, one cannot make more than one withdrawal in one financial year. The rule states, "In the event of a subscriber opting to subscribe for the aforesaid block period he shall be eligible to make partial withdrawals not exceeding 1 every year by applying to the Accounts Office in Form C, or as near thereto as possible, subject to the condition that the total of the withdrawals, during the 5 year block period, shall not exceed 60 per cent of the balance at his credit at the commencement of the said period.”

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If one has Rs 1 crore in the PPF account, it would earn one an interest of Rs 7.1 lakh a year. In other words, it means that if the individual withdraws Rs 7.1 lakh a year, the amount in the account remains R 1 crore and if the amount withdrawn is less, the amount of Rs 1 crore will become more in the year after the first withdrawal. Now Rs 7.1 lakh a year works out to Rs 59,166 a month on average. This can be used as a pension amount every month.

Suppose an individual puts Rs 1.25 lakh a year. If one is diligent to continue it for 27 years, one can reach Rs 1 crore. If one invests Rs 1.5 lakh a year -- the maximum possible amount -- one can reach the amount of Rs 1 crore in 25 years. Also, section 80C of the Income Tax Act 1961 exempts the subscriber from income tax upto Rs 1.5 lakh per year. So the return is actually higher.