Here’s how interest earned from PPF investments could be more than your Rs 1.5 lakh yearly contribution limit

The Public Provident Fund (PPF) is one of the most popular investment options in India, providing lucrative returns along with the benefits of tax exemptions. However, its true potential may be underappreciated by investors who view it solely as a tax-saving tool. By understanding the power of compound interest in a PPF investment, one can gain significantly higher returns over the long term.

For instance, when you invest Rs 1.5 lakh per annum in a PPF account for 15 years, the interest earned from the 11th year onwards could exceed your annual contribution, assuming a fixed interest rate of 7.1 per cent.

As per the existing rules, you can deposit a maximum Rs 1.5 lakh in your PPF account in a financial year and the current interest rate has been fixed at 7.1 per cent.  

The Power of compounding

The PPF scheme operates on the principle of compound interest. The beauty of compound interest lies in earning interest on the initial principal and the accumulated interest. With PPF, interest is compounded annually, leading to higher returns over the long term.

Let's consider an example where you invest Rs 1.5 lakh per annum for 15 years, with a fixed annual interest rate of 7.1 per cent. For the first ten years, your yearly contributions accumulate, generating a significant amount. However, the magic truly begins in the 11th year.

From the 11th year onwards, the annual interest accrued on the total sum is likely to be more than your yearly contribution of Rs 1.5 lakh. This phenomenon is due to the effect of compounding, which exponentially increases the interest earned on your cumulative investments.

Here's a rough calculation: by the end of the tenth year, your total contribution would amount to Rs 15 lakh (Rs 1.5 lakh x 10 years). If we apply the PPF's annual interest rate of 7.1 per cent, the compounded amount at the end of the tenth year would be around Rs 22.1 lakh.

In the 11th year, you add another Rs 1.5 lakh, making the principal Rs 23.6 lakh (Rs 22.1 lakh + Rs 1.5 lakh). The interest for this year would be around Rs 1.67 lakh (7.1 per cent of Rs 23.6 lakh), which is more than your annual contribution.

The phenomenon continues for the remaining tenure of the PPF account, with the interest earned each year exceeding your annual investment. By the end of the 15th year, the maturity amount would be much higher than the total contributions made, thanks to the power of compound interest.

PPF investment: Long term discipline 

The PPF is not just a tax-saving instrument but a powerful long-term wealth creation tool. By adopting a long-term perspective and leveraging the power of compounding, investors can earn more in interest than their annual contributions. It's a testament to the saying, "It's not about timing the market, but time in the market that counts."