Effectively managing your surplus funds is crucial for securing your long-term financial well-being. Not only does it protect your money from the eroding effects of inflation, but prudent investments also have the potential to grow your wealth over time. Therefore, when deciding where to allocate your excess funds, thoughtful consideration is paramount. Here’s a comprehensive guide to help you make an informed choice:
Public Provident Fund (PPF): The Public Provident Fund (PPF) is a government-backed, long-term investment vehicle known for delivering guaranteed returns that are unaffected by market fluctuations. It is an ideal choice for risk-averse investors seeking long-term wealth creation and is recognized as one of the most tax-efficient savings instruments. Under the old tax regime, it not only offers an 80C deduction but also ensures tax exemption on interest income and maturity proceeds. Currently, it yields a return of 7.1 percent, with a post-tax return exceeding 10 percent for the highest tax bracket.
One notable feature of PPF is its extended maturity period, which remains active beyond the initial 15 years and can be extended upon request. After the 15-year mark, the maturity value remains intact, though additional deposits are not permitted. If you desire a further 5-year extension, you can submit a renewal request within a year of maturity, and multiple extensions are possible. Additionally, your PPF account can serve as a dependable source of post-retirement income, enabling annual withdrawals after the 15-year mark.
However, there are certain limitations to consider. PPF contributions are capped at Rs 1.5 lakh, necessitating the exploration of other fixed-income avenues for higher savings. While you can open an account with just Rs 5, you must deposit a minimum of Rs 500 annually to maintain its active status. Liquidity options are available, allowing withdrawals starting from the 7th financial year, with a loan facility accessible from the 3rd financial year. Hence, procrastination in opening a PPF account is unnecessary.
Voluntary Provident Fund (VPF): For salaried individuals seeking to augment their savings, the Voluntary Provident Fund (VPF) provides an effective solution. This avenue allows you to contribute beyond the mandated 12 percent deduction, comprising basic salary and dearness allowance, to the Employees’ Provident Fund (EPF).
Investing in a VPF account offers a significant benefit, as contributions are sourced from your pre-tax income. To bolster your savings, you can opt for contributions exceeding the compulsory 12 percent deduction. Currently, it delivers an 8.15 percent interest rate, subject to annual revision.
Nevertheless, keep in mind that, apart from government employees, the tax exemption threshold for a single year stands at Rs 2.5 lakh. Should your EPF contributions surpass this limit, the interest on the excess EPF contributions becomes taxable from the fiscal year 2021-22. You retain the flexibility to increase your VPF contributions at any juncture during your employment, with many employers offering this option at the start of the financial year. Furthermore, your contribution to the Employees’ Provident Fund (EPF) qualifies for a Section 80C deduction, with a maximum limit of Rs 1.5 lakh.
National Pension System (NPS): For those focused on retirement planning, the National Pension System (NPS) represents an enticing investment avenue. This government-backed, voluntary retirement scheme caters to Indian citizens aged 18 to 60, offering a blend of debt and equity investment options that can potentially yield higher returns than conventional retirement plans. However, NPS investors must assess their risk tolerance and financial objectives since equity investments carry market-related risks. Principal amounts aren’t guaranteed, and returns can be volatile.
The Equity (E) fund of NPS has generated returns of 14-17 percent in the past year, while Government Bond (G) and Corporate Bond (C) schemes have yielded 8-9 percent over the same period.
NPS comprises two account types: Tier I and Tier II. Tier I is compulsory and primarily functions as a pension account, with withdrawal restrictions. In contrast, Tier II is optional, designed as a savings account offering greater withdrawal flexibility.
Upon reaching 60, NPS subscribers must allocate a minimum of 40 percent of their NPS corpus to purchase an annuity from a life insurance company. Simultaneously, they can withdraw up to 60 percent of the corpus as a tax-exempt lump sum.
Subscribers can also delay the lump sum withdrawal until they reach 70, and in the event of early exit before 60, they can withdraw a maximum of 20 percent of the corpus as a lump sum, with the remaining 80 percent reserved for an annuity, ensuring a steady post-retirement income.
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Your investment choice should align with your unique financial objectives, risk tolerance, and investment horizon. If you prioritize guaranteed returns and are risk-averse, PPF or VPF may be your ideal options. Conversely, if you possess a longer investment horizon and are open to risk for potentially higher returns, NPS could be a suitable choice.
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