Start planning for retirement with your first income: Investment returns should be higher than inflation, but also consider the impact of tax on it

Savings have great significance for Indians. The future is uncertain. Financial emergencies can strike at any time. In such a situation, by saving money, you can create a safety net for future expenses as well as financial needs. Therefore, it is advisable to invest a part of the income. We look at returns while investing savings. But two important factors are ignored: inflation and tax. These can reduce your returns.

Suppose you are in the 30% tax slab and your investment is getting 7% return annually. According to this, the net return after tax [7- 2.10 (7×30%)] Only 4.90% is left. This is around the current inflation rate. In such a situation, it is important to select where to invest and review it on time. It would be better to start planning for retirement with the first income.

1. SIP: Balanced returns, low risk

SIP of mutual funds is a better option to counter inflation. In SIP, investment is made at every rate of the market. This keeps the returns balanced and reduces the risk. From the tax point of view, you can choose debt or equity. Equity attracts less tax as compared to debt.

Similarly, there are many options for investing in mutual funds – debt, equity, hybrid, infrastructure etc. The risk in debt is low and in equity it is high. The returns are also usually higher than inflation. Some SIPs and mutual funds also offer tax exemption of up to Rs 1.50 lakh annually under 80C.

2. EPF: Super Tax Saving Scheme

EPF is a better investment option for the salaried class. If the employee wishes, he can invest more than the limit of 12% in it. It gives a return of 8.25%, which is twice the current rate of inflation. The interest received on the employee’s contribution is tax-free up to a limit of Rs 2.50 lakh per annum.

The interest received on the employer’s contribution portion is completely tax-free. If the basic monthly salary is Rs 40,000 at the age of 25, then the investment will be Rs 72 lakh in 25 years and the maturity amount will be Rs 2.89 crore.

3. PPF: Tax exemption up to Rs 1.5 lakh

This is a better option for both salaried and non-salaried investors. An account can be opened through post office or bank. You can invest a minimum of Rs 500 and a maximum of Rs 1.50 lakh in this. You get a tax exemption of up to Rs 1.50 lakh annually on the amount invested.

Currently, 7.10% interest is tax-free. There is no option of withdrawal for the first 5 years. A monthly investment of 5 thousand for 15 years will amount to 16.27 lakhs. This includes 9 lakhs investment and 7.27 lakhs interest income. This is better for those who want to stay away from market risk.

4. Gold: 8% annual return since 55 years

Investors have received an average return of 8% per annum on investment in gold between January 1971 and March 2024. Investing in gold also fulfills the immediate money needs of investors. Apart from physical gold, there are many investment options available in the market including Sovereign Gold Bond and Gold ETF (Exchange Traded Fund).

5. Bank FD: Safe investment, but low net return

​​​​​​​This is the most popular means of investment. Its return is based on the interest rates of banks. It is relatively low, hence it is not effective in fighting inflation. The interest received on FD is also taxable. Hence the yield (net return) is the lowest. But due to the option of withdrawing money when needed, it is the most liquid option.