Most of the government employees who joined before January 1, 2004 consider the General Provident Fund (GPF) as an ideal investment instrument that would help them fulfill all their financial goals as it is a government-managed fund, provides better interest rate than FDs and till the financial year 2020-21 the entire return was tax-free.
So, many of such government employees rely only on GPF and invest almost the entire basic salary in the fund, oblivious of the fact that the GPS interest rate would hardly beat the rate of inflation associated with the financial goals – like higher education, real estate etc – to fulfill which they are investing.
With the interest on contributions above Rs 5 lakh in a financial year becoming taxable, fulfilling financial goals through investments in GPF will now become harder to achieve.
For example, a government doctor wants to set up a well equipped nursing home after his retirement 12 years later that costs about Rs 1.5 crore at current price.
To accumulate the fund, he starts investing Rs 1 lakh per month in GPF, which currently offers an annual interest rate of 7.1 per cent.
However, the interest he gets on contributions of Rs 5 lakh in a financial year will be tax free and the interest he earns in excess contributions will be added to his taxable income, resulting in 30 per cent tax payout.
So, on the contributions exceeding Rs 5 lakh – that is on contributions of Rs 7 lakh per year – the post-tax rate of return will be 4.97 per cent.
As a result – assuming that the rate of interest on GPF remaining unchanged during the investment period – on the tax-free part, he will earn Rs 93,39,426 in 12 years and on the taxable part of the contributions, he will earn Rs 1,14,19,871 at the time of his retirement.
So, his total earning from the investment of Rs 1 lakh per year in GPF for 12 years, will be Rs 2,07,59,297.
However, assuming that the rate of inflation in setting up nursing homes is 10 per cent, the current cost of Rs 1.5 crore will become around Rs 4.71 crore after 12 years.
So, by investing Rs 1 lakh per month in GPF, the investor would be able to accumulate less than half of what he would need to set up the nursing home after 12 years.
With a 10-12 per cent rate of inflation in the education sector, even the goal of higher education can’t be fulfilled only through investments in GPF.
Not only that – assuming the current inflation rate of 6 per cent remains unchanged during the investment period of 12 years – to keep the same purchasing power, the value of money invested should become Rs 2,08,96,000 at the end of the investment period.
So, forget other financial goals, the GPF investment would hardly help him keep the purchasing power of the money invested intact.
