The Public Provident Fund (PPF) investors got the shock of their life on the first day of the new financial year 2020-21, when they found that the government has cut the interest rate on PPF contributions from 7.9 per cent per annum to 7.1 per cent per annum, a huge 80 basis points reduction!
This new rate of interest for PPF will be for the period April 1, 2020, to March 31, 2020, as the interest rates of small savings post office schemes are set and revised by the government at the start of every quarter of the financial year. The interest rates on all other post office schemes, including NSC, KVP, SCSS, SSY etc, have been reduced drastically.
A cut in interest rate means, your PPF balance will earn 0.8 per cent less than earlier and as the compounding of interest in PPF is done on annual basis, the impact on your PPF maturity amount could be huge.
Let us see how much impact a 0.8 per cent will have on your PPF corpus, assuming the interest rate and other factors remain constant.
By investing Rs 1.5 lakh for 15 years at 7.9 per cent, the PPF corpus would have been nearly Rs 43 lakh.
Now, at a lower interest rate of 7.1 per cent per annum, the PPF account after 15 years will have a corpus of nearly Rs 40 lakh, about 7 per cent of lesser corpus over 15 years!
Important to note that the rate of interest on PPF may keep varying every 3 months. Therefore, if you are using any PPF calculator to find out the PPF corpus, it’s better to keep a lower rate.
If you are saving in PPF for accumulating Rs 1 crore or investing in PPF for your retirement needs, you need to re-assess and re-evaluate the savings that you put into PPF. As per the Public Provident Fund Scheme 2019 rules, one can invest a minimum amount of Rs 500 and a maximum amount of Rs 1.5 lakh or Rs 12,500 per month in one financial year in PPF account.
PPF account extension for Rs 1 crore
Therefore, as the maximum amount to invest in one FY is capped, rather than knowing how much to invest in PPF to get Rs 1 crore, you need to know how much time will it take to get a crore.
PPF is a savings scheme for 15 years. But, as a PPF account holder, one can extend PPF account in a block of 5 years after the completion of 15 years. If you want to use PPF account to become a crorepati, you need to keep extending the PPF account till the PPF balance becomes Rs 1 crore.
If you invest Rs 1.5 lakh per year for 20 years ( first extension) at 7.1 per cent, the PPF account balance will be about Rs 66 lakh, which was Rs 40 lakh after 15 years.
But, if you extend by another 5 years ( second extension), i.e. by investing regularly for 25 years, the PPF balance will be Rs 1 crore approximately.
Therefore, to become a crorepati by investing in PPF, one needs to save Rs 1.5 lakh for 25 years (with two extensions) to create a corpus of nearly Rs 1 crore, assuming the rate of interest remains 7.1 per cent throughout the term. Even if the rate goes up or down, the average interest rate needs to be about 7.1 per cent over 25 years for you to create Rs 1 crore.