During employment, employees typically rely on provident fund as their lifeline mainly to build their retirement corpus. And with years of contribution both by the employer and the employee and along with the interest added, the benefit of compounding works in favour of the investor, thereby resulting in a sizeable corpus. On top of it, the tax-free status given to PF, makes it an attractive investment option, which is why investors want to continue the instrument for long.
As the PF account continues to earn interest, whether you are or not in an employment, makes most investors continue with the same.
But in case of the retirement and where the PF corpus is not withdrawn, post three years, the account becomes inoperative and no interest is paid. Also, post retirement, the interest earned on the account becomes taxable in case there is no fresh contribution to the account, thereby diminishing the returns net of taxes.
I am 30 years old. My husband and I plan to buy a house in Delhi in 10 years. We have around ₹15 lakh currently for this. We can invest ₹40,000 in systematic investment plans (SIPs). Will our investment be enough to buy a house worth ₹1.5 crore? If not, by how much should we increase our SIPs over the years?
If you save ₹40, 000 per month for the next 10 years, you will be able to save ₹48 lakh as your principal corpus. Assuming the growth rate at 10%, the corpus will become ₹82.6 lakh; at 12%, the corpus will be close to ₹93 lakh. In addition, you already have an existing savings of ₹15 lakh. At the same earnings rate of 12%, this will become ₹46.5 lakh. This means your combined corpus will be around ₹139.5 lakh, which is close to your targeted amount. And this is when we have not increased the savings rate over a long period of 10 years.
In addition, you will also have other goals in life over a period of time. So do increase your savings for both the house as well as other goals.
You may also consider taking a housing loan, subject to the tax advantage it brings as it adds tax efficiency to the portfolio and better cash flow management. Currently, you are allowed a deduction under Section 24 of the Income-Tax Act, 1961, of up to ₹2 lakh on interest paid on a self-occupied property.
The investment can be diversified and you can start doing monthly investments via SIPs.
Surya Bhatia is managing partner of Asset Managers. Queries and views at [email protected]