On 31st March 2020, the Ministry of Finance reduced the interest rate on the Public Provident Fund (PPF) to 7.1% from the earlier rate of 7.9%.
A direct impact is that you will earn a lower amount of interest on your PPF savings for the first quarter of the present financial year 2020-21.
But the rate cut also means that the time period required to accumulate a target wealth amount will increase further. This is an indirect impact of the PPF rate cut.
Let me explain a bit.
Suppose you are planning to save Rs. 1 Crore (target wealth corpus) for retirement by investing Rs. 12,500 per month (yearly Rs. 1.5 Lakhs) in PPF. This is the maximum amount that one can invest in PPF.
At a 7.9% rate of interest, in 15 years your PPF account would have accumulated Rs. 43,60,517. This is where the lock-in period of PPF investment gets over.
In order to achieve your target, you need to extend the maturity by a block of 5 years. Keeping the same amount of contribution of Rs. 12,500 you will achieve Rs. 1 Crore in 23.4 years. The exact wealth corpus at the end of 24th year will be Rs. 1,06,57,015.
| Year | Principal | Interest | Wealth Corpus |
| 1 | 150000 | 11850 | 161850 |
| 2 | 311850 | 24636 | 336486 |
| 3 | 486486 | 38432 | 524919 |
| 4 | 674919 | 53319 | 728237 |
| 5 | 878237 | 69381 | 947618 |
| 6 | 1097618 | 86712 | 1184330 |
| 7 | 1334330 | 105412 | 1439742 |
| 8 | 1589742 | 125590 | 1715331 |
| 9 | 1865331 | 147361 | 2012692 |
| 10 | 2162692 | 170853 | 2333545 |
| 11 | 2483545 | 196200 | 2679745 |
| 12 | 2829745 | 223550 | 3053295 |
| 13 | 3203295 | 253060 | 3456355 |
| 14 | 3606355 | 284902 | 3891258 |
| 15 | 4041258 | 319259 | 4360517 |
| 16 | 4510517 | 356331 | 4866848 |
| 17 | 5016848 | 396331 | 5413179 |
| 18 | 5563179 | 439491 | 6002670 |
| 19 | 6152670 | 486061 | 6638731 |
| 20 | 6788731 | 536310 | 7325040 |
| 21 | 7475040 | 590528 | 8065569 |
| 22 | 8215569 | 649030 | 8864599 |
| 23 | 9014599 | 712153 | 9726752 |
| 24 | 9876752 | 780263 | 10657015 |
PPF interest rate now reduced to 7.1% the time period required to reach Rs. 1 Crore will get extended.
Now at maturity (completion of 15 years), your PPF account would have a lower amount of Rs. 40,68,209.
Whereas, you will reach the target of Rs. 1 Crore in 24.6 years. For this, you will need to invest additionally in your PPF account for 14 months. The additional capital contribution will be Rs. 12,500 x 14 months = Rs. 1,75,000.
The exact amount in your PPF account at the end of the 25th year will be Rs. 1,03,08,015.
| Year | Principal | Interest | Wealth Corpus |
| 1 | 150000 | 10650 | 160650 |
| 2 | 310650 | 22056 | 332706 |
| 3 | 482706 | 34272 | 516978 |
| 4 | 666978 | 47355 | 714334 |
| 5 | 864334 | 61368 | 925701 |
| 6 | 1075701 | 76375 | 1152076 |
| 7 | 1302076 | 92447 | 1394524 |
| 8 | 1544524 | 109661 | 1654185 |
| 9 | 1804185 | 128097 | 1932282 |
| 10 | 2082282 | 147842 | 2230124 |
| 11 | 2380124 | 168989 | 2549113 |
| 12 | 2699113 | 191637 | 2890750 |
| 13 | 3040750 | 215893 | 3256643 |
| 14 | 3406643 | 241872 | 3648515 |
| 15 | 3798515 | 269695 | 4068209 |
| 16 | 4218209 | 299493 | 4517702 |
| 17 | 4667702 | 331407 | 4999109 |
| 18 | 5149109 | 365587 | 5514696 |
| 19 | 5664696 | 402193 | 6066889 |
| 20 | 6216889 | 441399 | 6658288 |
| 21 | 6808288 | 483388 | 7291677 |
| 22 | 7441677 | 528359 | 7970036 |
| 23 | 8120036 | 576523 | 8696558 |
| 24 | 8846558 | 628106 | 9474664 |
| 25 | 9624664 | 683351 | 10308015 |
The above calculation is made by keeping the rate the interest to be fixed at 7.1% for the rest of the tenure. But actually the rate of interest is revised by the Ministry of Finance for each quarter.
The historical PPF rates have come down in the last 10 years, the details of which is under:
| Period | PPF Rates |
| March 2009 – March 2012 | 8.6% |
| April 2012 – March 2013 | 8.8% |
| April 2013 – March 2016 | 8.7% |
| April 2016 – September 2016 | 8.1% |
| October 2016 – March 2017 | 8.0% |
| April 2017 – June 2017 | 7.9% |
| July 2017 – December 2017 | 7.8% |
| January 2018 – March 2018 | 7.6% |
| April 2018 – September 2018 | 7.6% |
| October 2018 – March 2019 | 8.0% |
| April 2019 – June 2019 | 8.0% |
| July 2019 – March 2020 | 7.9% |
| April 2020 -June 2020 | 7.1% |
If the rates dip lower, suppose to 6.5% then you will need to wait for one more additional year (26th year) to achieve your target wealth corpus of Rs. 1 Crore.
| Year | Principal | Interest | Wealth Corpus |
| 1 | 150000 | 9750 | 159750 |
| 2 | 309750 | 20134 | 329884 |
| 3 | 479884 | 31192 | 511076 |
| 4 | 661076 | 42970 | 704046 |
| 5 | 854046 | 55513 | 909559 |
| 6 | 1059559 | 68871 | 1128430 |
| 7 | 1278430 | 83098 | 1361528 |
| 8 | 1511528 | 98249 | 1609778 |
| 9 | 1759778 | 114386 | 1874163 |
| 10 | 2024163 | 131571 | 2155734 |
| 11 | 2305734 | 149873 | 2455607 |
| 12 | 2605607 | 169364 | 2774971 |
| 13 | 2924971 | 190123 | 3115094 |
| 14 | 3265094 | 212231 | 3477325 |
| 15 | 3627325 | 235776 | 3863102 |
| 16 | 4013102 | 260852 | 4273953 |
| 17 | 4423953 | 287557 | 4711510 |
| 18 | 4861510 | 315998 | 5177508 |
| 19 | 5327508 | 346288 | 5673796 |
| 20 | 5823796 | 378547 | 6202343 |
| 21 | 6352343 | 412902 | 6765245 |
| 22 | 6915245 | 449491 | 7364736 |
| 23 | 7514736 | 488458 | 8003194 |
| 24 | 8153194 | 529958 | 8683152 |
| 25 | 8833152 | 574155 | 9407307 |
| 26 | 9557307 | 621225 | 10178532 |
Alternate Option
Instead of putting all your money in PPF, you can diversify your portfolio by investing half of the money into mutual funds or long term equity shares to get higher returns.
For example, you can invest in mutual funds to earn 14 to 16% returns.
This will help you achieve your target corpus earlier. Additionally, diversification will also reduce the risk of your investment portfolio.
Suppose you invest 50% of the portfolio (Rs. 75,000) in PPF at 7.1% and the rest 75,000 rupees in a mutual fund with expected returns of 15%, then you can achieve Rs. 1 Crore of wealth in 19 years.
| Year | PPF & MF Annual Investment | Principal | Interest | PPF A/c | Principal | Returns | MF A/c | Total Corpus |
| 1 | 75,000 | 75000 | 5325 | 80325 | 75000 | 11250 | 86250 | 166575 |
| 2 | 75,000 | 155325 | 11028 | 166353 | 161250 | 24188 | 185438 | 351791 |
| 3 | 75,000 | 241353 | 17136 | 258489 | 260438 | 39066 | 299503 | 557992 |
| 4 | 75,000 | 333489 | 23678 | 357167 | 374503 | 56175 | 430679 | 787845 |
| 5 | 75,000 | 432167 | 30684 | 462851 | 505679 | 75852 | 581530 | 1044381 |
| 6 | 75,000 | 537851 | 38187 | 576038 | 656530 | 98480 | 755010 | 1331048 |
| 7 | 75,000 | 651038 | 46224 | 697262 | 830010 | 124501 | 954511 | 1651773 |
| 8 | 75,000 | 772262 | 54831 | 827092 | 1029511 | 154427 | 1183938 | 2011031 |
| 9 | 75,000 | 902092 | 64049 | 966141 | 1258938 | 188841 | 1447779 | 2413920 |
| 10 | 75,000 | 1041141 | 73921 | 1115062 | 1522779 | 228417 | 1751196 | 2866258 |
| 11 | 75,000 | 1190062 | 84494 | 1274556 | 1826196 | 273929 | 2100125 | 3374681 |
| 12 | 75,000 | 1349556 | 95819 | 1445375 | 2175125 | 326269 | 2501394 | 3946769 |
| 13 | 75,000 | 1520375 | 107947 | 1628322 | 2576394 | 386459 | 2962853 | 4591174 |
| 14 | 75,000 | 1703322 | 120936 | 1824257 | 3037853 | 455678 | 3493531 | 5317788 |
| 15 | 75,000 | 1899257 | 134847 | 2034105 | 3568531 | 535280 | 4103810 | 6137915 |
| 16 | 75,000 | 2109105 | 149746 | 2258851 | 4178810 | 626822 | 4805632 | 7064483 |
| 17 | 75,000 | 2333851 | 165703 | 2499554 | 4880632 | 732095 | 5612727 | 8112281 |
| 18 | 75,000 | 2574554 | 182793 | 2757348 | 5687727 | 853159 | 6540886 | 9298234 |
| 19 | 75,000 | 2832348 | 201097 | 3033445 | 6615886 | 992383 | 7608269 | 10641713 |
Conclusion
The time period of PPF investment increases for achieving the target corpus due to the lowering of the interest rate. For that matter, this will happen with any interest-bearing instrument.
Looking at the present PPF rate scenario, one can assume that 24 – 26 years will be required to meet the goal of reaching Rs. 1 Crore.
The alternate investment option would be to achieve your target amount of Rs. 1 Crore by investing long term in stocks or through mutual funds that have the potential to generate higher returns.
