- Date : 23/05/2020
- Read: 4 mins
Find out how you can use PPF investment to fulfil your dream of becoming a Crorepati.
Kaun Banega Crorepati (who wants to be a millionaire), is a question that the legendary anchor of the popular TV show often exclaims into your screen. Winning a crore in the TV show is one way of achieving it, but not all of us can count on that. However, with sound financial practice, everyone can be a crorepati. So while Kaun Banega Crorepati entices and questions the possibility of earning a crore, here we try to explore and come up with a simple long-term way of achieving it.
Can you become crorepati by investing in PPF?
The path to earning 1 crore can be covered using the simple saving scheme of Public Provident Fund (PPF). Don't believe? Keep reading! PPF is an investment-cum-tax saving instrument introduced by the National Savings Institute of the Ministry of Finance in 1968. It is worthwhile to note that PPF not only ensures a healthy saving habit but also helps to save on tax as well. Contribution to PF is eligible as a tax benefit under Section 80C of the Income Tax Act. Let’s look at how you can achieve the 1 crore milestone using PPF as a saving vehicle. How well do you understand PPF? Take this short quiz to find out
As an investor, you will have to calculate the monthly contribution and the timeline by which your savings will reach the magic figure. The longer the tenure of your savings, the lesser will be the monthly contribution required to be made. Although PPF has a mandatory 15-year lock-in period, you can and probably should extend it by another block of five years, or maybe more. While considering the tenure you have to take your retirement age into consideration.
For example, if you are 25 and plan to retire at the age of 60, you have 35 years of active service during which you can contribute towards your PPF account. The next step would be to calculate the monthly contribution which will grow into a 1 crore sum.
How to achieve 1 crore target?
It has to be agreed that 1 crore is a steep target to achieve if you rely only on PPF. Generally, the higher the risk, the higher is the probability of reward. So achieving 1 crore will be a lot easier if you expose yourself to the risk of the equity market. But having said that, the driving force behind PPF is the power of compounding. The power of compounding is best capitalised by starting investments early.
If you are wondering what an additional year can do with compounding, consider this:
1. If you invest Rs. 1,000 monthly for 20 years you end up getting back around Rs. 5,90,000, at 8% interest per annum.
2. Keep it for another year and you get more than Rs. 6,50,000.
3. This means an additional interest of Rs. 60,000.
To understand how your PF account can swell by increasing the tenure and monthly contribution, we take a look at the following illustration keeping the 1 crore mark as the yardstick.
In the above table, it is quite clear that as the number of years increase, the monthly contribution required to be made reduces drastically, with every five years. As a result, the principal component reduces while the interest portion increases.
Note: If a person contributes towards PF for 15 years with an aim to get back 1 crore, he or she will have to contribute 52 lakhs towards it.
However, if the same person plans to achieve it in 35 years, the principal contribution is much lower than 18 lakhs. Another point to note is that PF contribution up to 1.5 lakhs is eligible for tax deductions. This means that the entire contribution in the 25, 30 and 35 years’ scenario can actually be claimed as tax benefit too.
Apart from the power of compounding and the tax benefits, investing in PPF is also easy on the wallet. One can part with a small amount on a monthly basis and ensure that the amount accumulated is not withdrawn to build towards a sizeable corpus. PPF is ideal for people with a fixed and regular source of income. Being backed by the government, PPF is one of the safest debt instrument in the country. You can start investing in it today and see how you reach the 1 crore mark. Do you have what it takes to become a crorepati? Take this quiz to find out!