How much should I contribute to PF or PPF annually?

Bhimrao
Sep 20, 2019

I am 29 years old with an income of Rs 1.2 lakh per month. My monthly EPF deduction is about Rs 4,000 per month. This brings my total EPF deduction to Rs 48,000 per year. I do not have any other deductions under section 80C. I am thinking about investing in PPF. How much should I invest?

1 Answer
Sep 20, 2019

PPF or PF is a very important investment avenue and should form part of any salaried person’s retirement planning.

Investment portfolios can be a combination of equity and debt components. The ‘debt’ portion of your portfolio provides stability and predictability to your investments. Equity markets can be volatile and there is no guarantee of returns, however historically they have performed well over the long term. So you can think of the ‘debt’ portion as a protection against the volatility and uncertainty.

Current Interest Rates

EPF & PPF investments are government backed schemes and so they are considered ‘very safe’ investment avenues.

  • Current EPF interest rate 8.55% (fixed every year)
  • Current PPF interest rate 7.9% (fixed every quarter)

These are very good rates.

Tax Exemption

Both EPF & PPF qualify for tax exemption under section 80C, upto a limit of Rs 1.5 lakh every year. Which means any investment that you make will be subtracted from your salary before computing the tax. So this reduces your tax outgo. Also the proceeds will be tax free on redemption i.e. interest earned is tax free.

Sample Scenario

Lets take a scenario where a person contributed Rs 1.5 lakh to EPF or PPF for 25 years. I have assumed the interest rate to be 8%. The table below shows that you will end up with a sum of Rs 1.2 crores.

Stable & guaranteed returns with tax exemption on investment as well as redemption. A debt investment cannot get any better than this.

Investment Limits

You invest a maximum of Rs 1.5 lakh per year in PPF. You can also choose to increase your contribution of provident fund deduction. Remember that for tax exemption, there is a combined limit of Rs 1.5 lakhs under section 80C (it also includes life insurance premium and a few other things).

My suggestion for you

You can increase your contribution of provident fund deduction. This is called voluntary provident fund (VPF). It carries the same interest rate as that of EPF. Another option is opening a PPF account and invest Rs 1.5 lakh per year, even if it crosses your 80C threshold.

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