A quick way to calculate the time it takes to double your investment is to apply ‘Rule 72’. Divide the number 72 by the expected annual rate of return to determine when the money will double.
Rule 72 offers a quick calculation of the time it takes to double your investments at a fixed rate of return. Using this rule, we compare some popular tax-saving schemes in this article.
A quick way to calculate the time it takes to double your investment is to apply ‘Rule 72’. Divide the number 72 by the expected annual rate of return to determine when the money will double.
Rule 72 can also determine how much interest you need to earn to double your money over a specific period. This method, however, requires the investor to get a fixed rate of return.
Let us take as an example Public Provident Funds, which offers a fixed interest rate of 7.1 per cent. Say, you invest Rs 5 lakh in a PPF with a 15-year lock-in period and partial withdrawals allowed only after 7 years, how long will it take for your investment to double to Rs 10 lakh, or will it double within the lock-in period?
If the interest rate is 7.1 per cent, divide 72 by 7.1, which equals 10.14. The rule shows that in 10.14 years, your Rs 5 lakh deposit will double.
This rule, however, cannot be relied upon solely for choosing between schemes since it does not consider the amount of tax saved. In the above instance, investing in PPF offers a maximum tax deduction of Rs 1,50,000 under Section 80C of the Income Tax Act.
Fixed Deposits facilities in leading banks offer a maximum of 7.5 per cent interest on select tenures. So if you get a 7.5 per cent interest rate, it will take 9.6 years to double the money. You can use this calculation to determine when to end your automatic renewal option for fixed deposits. There are many tax-saving fixed deposits (FDs) with a minimum tenure of five years.
At the current interest rate of 7.6 per cent, Sukanya Samriddhi Yojana will take approximately 9.4 years to double your money. It has all tax advantages provided by PPF and offers a better interest rate, but the maturity proceeds can be used only for a specified purpose like marriage and education of your girl child.
National Savings Certificates will take approximately 10.5 years to double your investments at 7 per cent interest. Due to its market-linked nature, the National Pension System (NPS) offers an interest rate ranging from 9 to 12 per cent per year. Assume that you get an 11 per cent interest rate, it will take 6.5 years to double your investment in NPS.