India Markets open in 25 mins

Limit of tax-saving investments can’t be your investment benchmark: Here is why

Amitava Chakrabarty
income tax, tax-saving investments, 80C benefits, Public Provident Fund, PPF, Rs 1.5 lakh investment limit, Fixed Deposit, FD, FD interest, rate of inflation, 80C investment limit, PPF investment, retirement corpus, standard of living

Annual income of Anil (name changed) is Rs 10 lakh and his monthly essential expenditure is Rs 50,000. Anil’s age is 30 years and he works in a private company. To take benefits of tax-saving investments, he invests Rs 1 lakh in PPF each financial year as other eligible expenses cover remaining Rs 50,000 u/s 80C.

Assuming 8 per cent per annum interest rate on PPF in his investment period of 30 years till he retires, the maturity value in his PPF account would be Rs 1,22,34,587. Taking Fixed Deposit (FD) interest rate of 7 per cent per annum after his retirement, by investing the corpus, Anil would get Rs 8,56,421 per annum as interest, which is Rs 71,368 per month to spend after retirement.

However, taking into account a consistent 5 per cent rate of inflation, the current essential monthly expenditure of Rs 50,000 would become Rs 2,16,097 per month just after his retirement. So, forget about maintaining the standard of living, he can’t even meet his basic necessities with the available monthly interest of Rs 71,368.

Even if he invests full PPF limit of Rs 1.5 lakh per annum, he would be able to accumulate a corpus of Rs 1,83,51,880, which would provide him interest of Rs 12,84,632 a year around or Rs 1,07,053 per month, which would also be around just half of what he would need per month to survive.

To get Rs 2,16,097 per month to survive just after retirement or Rs 25,93,164 per year, he would need at least Rs 3,70,45,200 to invest in FD that would give interest at 7 per cent per annum. However, with rising prices even after retirement, he would need more to sustain in the later years.

Considering, the requirement of around Rs 4 crore as retirement corpus, either he needs to invest Rs 1.5 lakh during his working life of 30 years in an instrument that would provide him compound annual return of 11.94 per cent or in an instrument like PPF that gives 8 per cent per annum interest, he would need to invest Rs 3,26,942 per year.

So, the investment limit of Rs 1.5 lakh, which is eligible for deduction u/s 80C, is just a limit that the government things fit. But with variation in standard of living, different people in different income groups would have to invest differently.

For example, an employee earning Rs 3 lakh per annum can’t even save Rs 1.5 lakh in a year and may not need that much investment to maintain his/her standard of living. But for a man earning Rs 50 lakh per annum, investment of even Rs 15 lakh per annum would be insufficient, unless invested in proper asset class to provide adequate return for adequate investment period.

So, don’t go by the limits of tax-saving investments, but calculate your financial needs and plan your investments properly, so that proper investment avenue may be selected and adequate investments may be made taking into consideration the level of income, so that adequate corpus may be accumulated to meet financial goals.