PPF: With interest rate retained at 7.1%, see its long term value

Kolkata: The Union finance ministry has benefitted a very large number of common people by ignoring the Shyamala Gopinath recommendation on fixing interest rates for interest rates on small savings. The committee had prescribed that the government should add 25 basis points to the average yield of the 10-year G Sec to arrive at the interest rate it should pay on small savings instruments. If the recommendations were strictly adhere to, the PPF interest rate would have come far below to current 7.1% and close to 6.5%.

Broadly speaking, the Gopinath committee recommendations were a way of linking the small savings interest rate to the market. The government reviews the interest rates on all small savings instrument once every three months. After the RBI aggressively slashed the Repo Rate by 100 basis points between February and June, the yield on G Secs have come down sharply, which had paved the way for a rate cut on small savings instruments including PPF. With the government choosing to protect the interest of the common investor, it is time to have a relook at PPF, a favourite of generations to build long-term capital with complete safety of funds.

PPF was launched in 1968. As the name suggests, it was designed to offer the common person a scope to create a long term corpus that could be used in later years -- as provident fund for the public. The initial lock in period of the PPF is 15 years, but there is no need for one to take out the investment after 15 years. In fact, one can continue it for decades since one can stretch the duration of investment by multiples of five years -- 20, 25, .... 35, 40, 45 years and so on. Moreover, if one is in the old tax system, PPF offers income tax deductibility to the maximum amount of Rs 1.5 lakh a year.

Most significantly, one can use PPF as a source of pension funds. According to the rules, one can take out money once a year and it will free from income tax (under the old tax system). For example, if one has Rs 50 lakh in the PPF, one can take out Rs 3.55 lakh each year, which amounts to nearly Rs 30,000 each month.

If one uses a PPF calculator one can easily find out that on a yearly investment of Rs 1.5 lakh every year, one can accumulate Rs 40,68,209 in 15 years. This assumes a 7.1% interest. Now think of very long term investment in this fund. This of a youth who begins earning at 25. He/she begins investing Rs 1.5 lakh a year in PPF and is diligent in approach. If this continues till the age of 60, the EPF account will have a cool Rs 1,54,50,911 (or Rs 1.54 crore). It assumes that the rate of interest remains at 7.1%. Also note, if the corpus in PPF account is Rs 1.54 crore, one can withdraw an amount of Rs 10.93 lakh a year from it every year without any dip in the original corpus.  It works out to Rs 91,116 a month, which can work like a significant pension.