How a PPF Account Can Give You a Regular Tax Free Pension Income

When it comes to retirement planning, many overlook the incredible potential of a Public Provident Fund (PPF) account. Beyond being a tax-saving investment, PPF can provide a steady, tax-free pension income during your golden years. Here's how.

📌 How This Works in Simple Steps

1. Save ₹1.5 lakh every year for the first 15 years: Build your savings during the PPF account’s lock-in period.
2. Extend your PPF for another 5 years, contributing ₹1.5 lakh yearly: Grow your savings further during this optional extension.
3. After 25 years, stop contributing but keep the account active: Your savings continue to earn interest. Withdraw this interest each year as your pension.
4. Stay in Control: Unlike other pension plans like the National Pension System (NPS), PPF offers full flexibility—you decide how and when to use your funds.

A Simple Example

Let’s illustrate this with an example. Suppose you save ₹1.5 lakh every year, and the interest rate is at 7.1% per annum.

Phase 1: Saving for 15 Years

  | Year | Money Saved (₹) | Interest Earned (₹) | Total Savings (₹) |
  |------|------------------|---------------------|-------------------|
  | 1    | 1,50,000         | 1,50,000            | 1,50,000          |
  | 2    | 1,50,000         | 1,60,650            | 3,10,650          |
  | 3    | 1,50,000         | 1,72,056            | 4,82,706          |
  | 4    | 1,50,000         | 1,84,272            | 6,66,978          |
  | 5    | 1,50,000         | 1,97,356            | 8,64,334          |
  | 6    | 1,50,000         | 2,11,367            | 10,75,701         |
  | 7    | 1,50,000         | 2,26,375            | 13,02,076         |
  | 8    | 1,50,000         | 2,42,448            | 15,44,524         |
  | 9    | 1,50,000         | 2,59,661            | 18,04,185         |
  | 10   | 1,50,000         | 2,78,097            | 20,82,282         |
  | 11   | 1,50,000         | 2,97,842            | 23,80,124         |
  | 12   | 1,50,000         | 3,18,989            | 26,99,113         |
  | 13   | 1,50,000         | 3,41,637            | 30,40,750         |
  | 14   | 1,50,000         | 3,65,893            | 34,06,643         |
  | 15   | 1,50,000         | 3,91,872            | 37,98,515         |

Phase 2: Extending your PPF amount to 5 more Years (with contribution option) Adding Money for 5 More Years i.e. till 20 years

  | Year | Money Saved (₹) | Interest Earned (₹) | Total Savings (₹) |
  |------|------------------|---------------------|-------------------|
  | 16   | 1,50,000         | 4,19,694            | 42,18,209         |
  | 17   | 1,50,000         | 4,49,493            | 46,67,702         |
  | 18   | 1,50,000         | 4,81,407            | 51,49,109         |
  | 19   | 1,50,000         | 5,15,587            | 56,64,696         |
  | 20   | 1,50,000         | 5,52,193            | 62,16,889         |
  

Phase 3: Extending your PPF amount to 5 more Years (with contribution option) Adding Money for 5 More Years i.e. till 25 Years

  | Year | Money Saved (₹) | Interest Earned (₹) | Total Savings (₹) |
  |------|------------------|---------------------|-------------------|
  | 21   | 1,50,000         | 5,91,399            | 68,08,288         |
  | 22   | 1,50,000         | 6,33,389            | 74,41,677         |
  | 23   | 1,50,000         | 6,78,359            | 81,20,036         |
  | 24   | 1,50,000         | 7,26,522            | 88,46,558         |
  | 25   | 1,50,000         | 7,78,106            | 96,24,664         |

Phase 4: Using Your PPF Without Adding Money and extending each 5th Year

When extending a PPF account for 5 more years, you have two options:

1. With Contribution

   • Continue adding money to the account.

2. Without Contribution

   • No additional money is added.

Key Points for Extension Without Contribution

• The account holder can withdraw money once a year.
• It is recommended to withdraw only the interest accrued on the principal amount.
• Any withdrawn interest is tax-exempt under the Income Tax Act, regardless of the amount.

So in this phase you choose option 2, extending PPF without contribution.

After 25 years, your savings will grow to around ₹9600000(Ninty Six Lakh) approx. Each year, this earns interest of ₹6,83000 (Six Lakn Eighty Three Thousand) (at 7.1%). You can withdraw this interest amount ₹6,83000 lakh annually once as tax-free pension income, while your principal remains intact and continues compounding.

Your Monthly pension would be ₹57000/- approx.

Why PPF Outshines Other Pension Plans

• 💰 Tax-Free Income: PPF withdrawals and interest are entirely tax-free, unlike the NPS where pension income is taxable.
• 📜 No Annuity Lock-In: With PPF, there’s no requirement to convert your savings into an annuity.
• ⚖️ Low Risk: Government-backed and risk-free.
• 🛠️ Flexible Access: Withdraw funds as needed without restrictions.
• 👨‍👩‍👧‍👦 Inheritance: Your PPF savings can be passed to your heirs without conditions.

Comparing PPF and NPS

Author Thoughts

PPF is more than a savings account—it’s a tool for financial independence in retirement. By systematically saving, extending the account, and withdrawing tax-free interest as a pension, you secure steady income without the risks or restrictions of other plans. Choose PPF for a simpler, safer, and stress-free retirement.