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Monday, July 18, 2016

8 ways to use pay hike to increase financial security

ET Bureau

The incomes of Central government employees and pensioners are poised to rise next month. They will also get the arrears. Here are some suggestions on how to handle this sudden flush of liquidity. These eight investing ideas can also be used by private sector employees who just got increments. 

Contributory PF 

Opt for higher contribution to your PF account 

The Contributory Provident Fund is a great way to build a tax-free corpus for your retirement. Intimate the accounts division of your office to deduct a higher contribution from your salary towards the CPF. General Provident Fund allows employees who opt for a higher contribution to change the mandate twice in a year. Also, a portion of the corpus can be withdrawn for specific purposes and emergencies. 

Monthly contribution: Rs 5,000 
Interest rate: 8.75% 

Value after 20 years: Rs 32.25 lakh 

Recurring deposit 

Interest rate does not change till deposit matures 

If you are looking to save for a short-term goal, go for recurring deposits. It is a safe option that inculcates the saving habit. Banks offer recurring deposits of up to 10 years, but one should choose a tenure that matches one's requirements. The big advantage is that once you start a recurring deposit, the interest rate does not change. Even if rates fall, you get the contracted rate till the deposit matures. 

Monthly contribution: Rs 10,000 
Interest rate: 7.5% 
Value after 3 years: Rs 4.15 lakh 

New Pension System 

Avail of additional tax benefit on NPS investments 

The additional money coming your way can help you save tax. Invest up to Rs 50,000 in the NPS to get additional tax deduction under the new Sec 80 CCD(1b) This is over and above the tax deduction under Sec 80C. The tax benefit means a person in the highest 30% tax bracket effectively invests only Rs 34,550. You can invest in a mix of equity funds, corporate bond funds and government bond funds. 

Monthly contribution: Rs 4,000 
Returns assumed: 9% 
Value after 20 years: Rs 32.2 lakh 

Life insurance cover 

Low-cost cover safeguards future of your dependents 

Life insurance helps mitigate the financial stress on a family if the breadwinner dies. Ideally, the cover should be 6-7 times your annual income. While traditional insurance policies have high premiums, a low-cost term plan can give high cover without straining your wallet. 

8 ways to use pay hike to increase financial security

Equity funds 

Take exposure to stocks with tax-saving ELSS funds 

Equities play a critical role in an investment portfolio. Even the most conservative portfolio should have some exposure to stocks to be able to beat inflation. You can invest in stocks through mutual funds. The ELSS category is the best option for new investors. These schemes are eligible for tax deduction under Sec 80C. The long-term capital gains from equity funds are also exempt from tax. 

Monthly contribution: Rs 5,000 
Returns assumed: 12% 
Value after 10 years: Rs 11.20 lakh 

Low risk mutual funds 

If wary of stocks, go for low-risk mutual funds 

If the thought of investing in stocks unnerves you, go for low-risk monthly income plans (MIPs) or debt funds. MIPs have only a small portion (15-20%) of their corpus invested in stocks. The rest is in bonds and deposits. Debt funds are even less risky. They don't have any exposure to stocks. Debt funds are a better option than fixed and recurring deposits because the income is taxed only at the time of withdrawal and that too at a lower rate. However, the returns of these funds are also lower. 

Monthly contribution: Rs 10,000 
Returns assumed: 9% 
Value after 5 years: Rs 7.5 lakh 

Atal Pension Yojana 

Secure your future with this new pension scheme 
This scheme is a good addition to your retirement plan. It is open to people under 40 and one needs to contribute till the age of 60. The pension will start after the investor turns 60 and continues for life. On death, roughly Rs 8.5 lakh is given back to the legal heirs of the investor. 
8 ways to use pay hike to increase financial security

Sukanya Samriddhi Yojana 

Save for daughter's education and get tax benefits 

The Sukanya Samriddhi Yojana is another good scheme to invest in. However, it is only for girls below the age of 10 and there is an annual investment limit of Rs 1.5 lakh. Contributions are eligible for Sec 80C benefit and the corpus is tax-free. Though the returns are assured, the interest rate could go down in future because it is linked to the government bond yields. Even so, it will be higher than what the PPF offers. 

Monthly contribution: Rs 12,500 
Interest rate: 8.6% 
Value after 14 years: Rs 40 lakh 

Source:-The Economic Times 

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