How PPF compounds
The Public Provident Fund credits interest once a year, on 31 March, at the government-notified rate. Model a yearly deposit of D at rate r and the balance follows the annuity pattern, each deposit earns from its year of entry to maturity:
balance after n years = Σ D × (1 + r)^(years remaining)
At ₹1.5 lakh yearly and 7.1%, the corpus crosses ₹10 lakh in year 6, ₹20 lakh in year 10 and finishes near ₹40.7 lakh in year 15. The curve steepens because later years compound a bigger base, the last five years generate almost as much interest as the first ten combined.
Why 7.1% tax-free beats higher taxed rates
| Instrument | Headline rate | After-tax at 30% slab |
|---|---|---|
| PPF | 7.1% | 7.1% (tax-free) |
| 5-year FD | 7.0% | ≈ 4.9% |
| FD equivalent needed to match PPF | ≈ 10.1% | 7.1% |
For a 30%-bracket saver, PPF's 7.1% is equivalent to a taxable deposit paying about 10.1%, a rate no bank offers. That arithmetic, not patriotic sentiment, is why the scheme fills every April. Compare the taxed path with the FD calculator.
Where PPF fits in a plan
- The floor of a portfolio, guaranteed, sovereign-backed, tax-free. The equity engine belongs elsewhere: a SIP at 12% assumptions triples what PPF builds over the same 15 years, with the volatility that implies. Most long-term plans want both.
- The lock-in is a feature. Money that cannot be touched survives every market panic and every impulsive purchase. Use PPF for goals at least a decade out.
- One account per person, ₹1.5 lakh per year cap (including a minor's account you guardian), ₹500 minimum to keep it active. Missing the minimum incurs a small penalty and a revival step, set a yearly auto-transfer and forget it.