Public Provident Fund (PPF) investment strategy: You can turn Rs 22.5 Lakh into Rs 1.3 Crore!

Smart Public Provident Fund Strategy: The Income Tax measures announced in Budget 2019 is set to encourage more individuals to put their money in tax-saving schemes like Public Provident Fund (PPF) and National Pension System (NPS). Now, individuals with taxable income up to Rs 5 lakh will get a full tax rebate - in other words, they won't have to pay any income tax. 

"Individual taxpayers having taxable annual income up to Rs 5 lakhs will get full tax rebate and therefore will not be required to pay any income tax. As a result, even persons having gross income up to Rs 6.50 lakhs may not be required to pay any income tax if they make investments in provident funds, specified savings, insurance etc," Finance Minister Piyush Goyal said in his maiden budget speech in the Lok Sabha on Friday. 

Here, we are talking about the taxable income and not just the total annual salary you receive. Taxable income can be calculated by adding all emoluments and bonuses and deducting the exempted parts. Only the income that surpasses the exemption limit is taxed as per the prescribed rates. 

To calculate total taxable income on salary, add all emoluments such as basic salary HRA, TA, DA, DA on TA, and other reimbursements (mentioned in Form 16 Part B and slips) and bonus received during the financial year. From this, deduct exempted portions including HRA and Rs 50,000 (the standard deduction announced in Budget 2019). The result would be your total taxable income. 

For a person having a taxable income of, say, Rs 6.5 lakh, it would be advisable to invest at least Rs 1.5 lakh in tax-saving instruments. Or else, s/he will end up paying Rs 30,000 + Rs 12,500 = Rs 42,500 as income tax.  [Calculation based on the existing income tax slab rates]

Investing this Rs 1.5 lakh per year in PPF account could be very fruitful. In fact, at the current rate of 8 per cent, PPF deposit of Rs 1.5 lakh/year for 15 years can help you accumulate over Rs 42 lakh. 

PPF rules allow an investor to extend the account in blocks of five-year each beyond the compulsory lock-in period of 15 years. Your amount will continue to earn interest in the extended years even if you make no deposit. 

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As per the current rate of interest, by simply letting your total PPF money stay in the account for another 15 years, your 15-year investment (total Rs 1,50,000 x 15 = Rs 22,50,000) may grow over Rs 1.3 crore. So, if you start investing at the age of 30 as per the strategy discussed here, you will be able to retire with a corpus of Rs 1.3 crore. If annuity schemes like LIC Jeevan Shanti remain active, it will help you get a monthly pension of over Rs 90,000. 

(Note: Online PPF and LIC Jeevan Shanti calculators have been used for this article.)