By understanding and strategically following the rules of the Public Provident Fund (PPF), you can leverage this government-backed savings scheme to secure a substantial, tax-free pension after retirement.
Tax Free Monthly Pension Of Rs 60,000
The Public Provident Fund (PPF), one of the most popular small savings schemes the post office offers, is often viewed as a retirement tool. With a maturity period of 15 years, many working professionals invest in it to accumulate funds for their retirement. However, few are aware that PPF can also be used to generate a tax-free pension income. By carefully studying the PPF rules and investing wisely, you can transform your PPF account into a reliable source of income after retirement. Here’s how it works.
Rules for Extending the PPF Account
The standard maturity period for a PPF account is 15 years, but it can be extended indefinitely in blocks of five years (according to the PPF Extension Rules). If desired, you can continue the account for 20, 25, 30, or even 35 years. Upon maturity, you have two options:
- Extend without further contributions: Your existing balance will continue to earn interest at the prevailing rate.
- Extend with ongoing contributions: If you choose to keep investing, your funds will continue to grow at the current interest rate, just as they did during the initial 15 years.
The interest rate on PPF is currently 7.1% per annum, making it an attractive long-term savings option.
Withdrawal Rules During PPF Extension
When your PPF account matures, and you decide to extend it for another five years, two scenarios may arise:
- Extension without further contributions: In this case, you can withdraw the entire balance once a year during the extended five-year period.
- Extension with continued contributions: As per the PPF Withdrawal Rules, you are allowed to withdraw up to 60% of your total balance at any time during the extended period.
These withdrawal options provide flexibility for managing your funds, whether you want to keep your savings intact or access them as needed.
Building a Retirement Fund with PPF
Consider the case where you begin investing in a PPF account at 35. After the initial 15-year maturity period, you can extend the account for another ten years, allowing you to maintain it until you turn 60.
The current rule allows you to deposit up to Rs 1.5 lakh per financial year into your PPF account. If you contribute the maximum limit of Rs 1.5 lakh each year at the current interest rate of 7.1%, your PPF account will accumulate approximately Rs 40.68 lakh by the end of 15 years. If you extend the account and continue investing for another ten years, your balance could reach Rs 1 crore by retirement at age 60.
Enjoy a Tax-Free Pension After Retirement
Once you’ve accumulated Rs 1 crore in your PPF account, you can extend it for another five years without making further contributions. The existing balance will continue to earn interest, which, at the current rate of 7.1%, would generate Rs 7,31,300 in interest annually.
According to the withdrawal rules, you can withdraw the entire balance each year during an extended period. By withdrawing only the interest, you could withdraw Rs 7,31,300 annually, approximately Rs 60,917 monthly. This income would be completely tax-free, offering you a reliable, tax-exempt monthly pension.
Conclusion
The Public Provident Fund is not just a long-term savings scheme but a powerful tool to build a substantial, tax-free pension after retirement. By strategically extending your PPF account and carefully planning withdrawals, you can ensure a steady stream of income that supports you well into your retirement years. With the added advantage of being completely tax-free, PPF offers a compelling option for those looking to secure a comfortable financial future.
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