Benefits of Provident Fund Savings

provident fund

Benefits of Provident Fund Savings

Research shows millennials are either scared of market volatility or tend to be uneducated when it comes to personal finance. Then, there is another group who are skeptical about opting for long term savings.

Others, who like to finish their total salary as soon as it is deposited and never save a penny while, the shopaholics always run in credit card debts and always end up paying minimum due amount instead of total payable amount.

You can be anyone of them, but then there still is scope to save small for huge and promised returns. No no I ain’t talking about mutual funds or buying a stake in some startup. The deal is– Provident Fund.

Provident Fund comes across as a safe investment option with a bag full of benefits. Return on Provident Fund is guaranteed as it is a government backed small savings scheme. Of course, the interest rate on offer in Provident Fund is not what one may expect from equity investments. But taking the risk factor of equity and mutual fund investment into account, the Provident Fund interest rate may appears always healthy.

Healthy Interest Rate

In the last five financial years, the interest rate on Provident Fund has remained in the range of 7.5-9 per cent. The current Provident Fund interest rate is 7.9 per cent and it is reviewed by the government on quarterly basis. Provident Fund also comes with triple tax benefits with an investment limit of INR 1.5 lac per annum. The amount invested in Provident Fund, the interest earned on it and the amount withdrawn on maturity are exempted from income tax. So, there is a genuine saving in income tax payable every year.

A Steady Saving

By investing the maximum limit of INR 1.5 lac per annum in Provident Fund, you can accumulate a large lump sum as a retirement cheque. Although, the maturity period of Provident Fund account is 15 years at present, you can extend the account for a period of five years each on request and continue investing and earning.

The following calculation will give you an idea of how much your investment of Rs 1.5 lac per annum would grow to in 15 years.

Assuming the interest rate remains constant at 8 percent for next 15 to 25 years.

Calculation chart at 8% interest would be:

YEAR Opening Balance Amount deposited  Interest Earned Closing Balance
1 0 1,50,000 12,000 1,62,000
2 1,62,000 1,50,000 24,960 3,36,960
3 3,36,960 1,50,000 38,956 5,25,916
4 5,25,916 1,50,000 54,073 7,29,989
5 729,989 1,50,000 70,399 9,50,388
6 9,50,388 1,50,000 88,031 11,88,419
7 11,88,419 1,50,000 1,07,073 14,45,492
8 14,45,492 1,50,000 1,27,639 17,23,131
9 17,23,131 1,50,000 1,49,850 20,22,981
10 20,22,981 1,50,000 1,73,838 23,46,819
11 23,46,819 1,50,000 1,99,745 26,96,564
12 26,96,564 1,50,000 2,27,725 30,74,289
13 30,74,289 1,50,000 2,57,943 34,82,232
14 34,82,232 1,50,000 2,90,578 39,22,810
15 39,22,810 1,50,000 3,25,824 43,98,634

A Secure Retirement

You can see from the chart above that Rs 1,50,000 per year investment in Provident Fund account can grow up to Rs 43,98,634 i.e., approximately 44 lac in 15 years if the interest rate remains at 8 per cent. Following the same calculation, your annual investment of Rs 1.5 lakh in Provident Fund can return more than Rs 1.1 crore in 25 years, for the same interest rate. That makes a significant retirement fund.

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