Where To Invest Your Surplus Money From The 7th Pay Commission Salary Hike?

Government employees are in for a bonanza after the government approved the 7th Pay Commission salary hike. Government employees will now get increased amounts that totals a huge Rs 1.14 trillion ($16.88 billion) in 2016/17.

These huge sums would trigger an economic recovery and leave large amounts of surplus with government employees. Take a look at the various options that government employees would have and whether you should invest in the same.

PPF

If you have never invested in the Public Provident Fund or PF, we suggest that you go for it from your salary increment of the 7th Pay Commission. There are four reasons for our suggestion. The first is that the interest earned is tax free. The second is that you get tax benefits under SEC80C of the Income Tax Act.

The third is that it builds a corpus for your retirement. And the last is because interest rates are much better than bank deposits and the interest is also tax free.

Best banks to open a PPF account

Gold

If you receive large sums through salary arrears, gold would be a bad investment to put lumpsum amounts, because it has already gained 25 per cent in the last 1 year. The price has already gone up, so it may not be the best investment for a large lumpsum amount. 10 grammes gold prices had ralied from Rs 24,800 at the start of the year to Rs 30,000 now.

Why gold ETFs are better than physical gold

Shares

As we write share prices have hit a new 2016 peak, so this asset class has also seen a sharp rise. Investing a lumpsum at these rates may not be advisable, though you can go in for a systematic investment plan.

Recurring deposits

Now that your salary is likely to be hiked, you are likely to have a higher income and you need to save from that. We believe that you must now save from your salary hike and put the extra income to work. You can start by investing a fixed some each month in recurring deposits. Most recurring deposits would give you an interest rate of 7-8 per cent. You could thus build a corpus for your future needs. Having said that this is not the best in terms of tax efficiency.

So, if you are already paying tax, this would add to your total income and only increase your tax liability.

Mutual Fund Units

If you have the penchant to take risks, we suggest you look at the Systematic Investment Plan options and not putting lupmsum. The lumpsum investment in equity mutual funds at the moment could be slightly risky because of the higher prices, which is why it is a risky proposition. At the moment stock markets are already at 2016 peaks and the risk to reward ratio is not very favourable.

Bank deposits

We are not very enthusiastic to recommend bank deposits for two reasons: The first is that the interest on them is very low. Most public sector banking units are offering interest rates of only around 7-7.5 per cent, which is not the best around. The second is that the interest rates on them is taxable, lowering your yields even further.

Company fixed deposits

While the interest rates on these too are taxable, those receiving money from the 7th Pay commission could invest in them, because interest rates are much better than bank deposits. You can get a decent interest rate of 8.5 to 9 per cent in AAA rated company deposits.

What is the difference between bank deposits and company deposits

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