To build your retirement corpus, you can choose from a bunch of equity and debt and a mix of either instruments. The ideal strategy would be to include a mix of debt and equity instruments though.
Debt options would include the Employees’ Provident Fund (EPF) and the Public Provident Fund (PPF).
Employees’ Provident Fund: If you are in a salaried job, you can maximise your EPF contribution to the maximum limit allowed for tax-free contribution in a year. Contributions up to Rs 1.5 lakh qualify for tax deductions under Section 80C of the Income-tax Act, 1961. Moreover, EPF enjoys the exempt-exempt-exempt (EEE) tax status, which means the returns are also tax-free.
Public Provident Fund: If you are not in a salaried job and do not enjoy the benefit of EPF, you can invest in Public Provident Fund (PPF). This is another effective debt instrument and offers the same tax benefits as EPF. PPF also enjoys the EEE status. You need to invest anything between Rs 500 and Rs 1.5 lakh per year. The rates are a little lower than what is offered on EPF. The rates are announced every quarter.
Equity Mutual Funds: It is important that you add equities to your investment basket for building your retirement corpus, as they give long-term benefits. There is practically no other instrument that can match the returns provided by equity-related instruments, such as equity mutual funds and stocks.
In addition, equities beat inflation over the long term, and building a retirement corpus is a long-term objective.
One can choose from a bouquet of large-cap equity mutual funds, as they are cost-effective and offer flexible investment avenue for long-term wealth creation. One can also choose from solution-oriented retirement funds.
NATIONAL PENSION SYSTEM
This is an effective retirement solution provided by the central government that offers a combination of debt and equity depending on your choice and age. It provides tax deduction up to Rs. 1.5 lakh under Section 80C of the Income-tax Act, 1961, along with an additional deduction of Rs. 50,000 under Section 80CCD (1b) of the Act.
NPS is actually tailor-made for retirement. Besides providing additional tax benefit to the investor, its compulsory lock-in and stringent withdrawal conditions impose investing discipline.
Upon maturity, a part of the corpus can be withdrawn as a lump sum, while a part has to be bought as annuity through an insurance company, which is, however, taxable.