7th Pay Commission: Gratuity Limit Doubled To Rs 20 Lakh. Where To Invest

The gratuity limit has been increased to Rs 20 lakh from Rs 10 lakh Gratuity money should be invested to draw a regular income Annuities can be one of the options to invest gratuity amount

The gratuity money should be invested to draw a regular income.
The gratuity money should be invested to draw a regular income.

On the recommendation of Seventh Pay Commission, the government has increased the gratuity limit to Rs 20 lakh from Rs 10 lakh. This is good news for government employees as they will get more money on retirement.

The gratuity money should be invested to draw a regular income so that it complements earnings from other sources.

Equity mutual funds: Though equities are high-risk, high-reward investments financial planners say that some exposure to this inflation-beating asset class is essential given the rising life expectancy. Manoj Nagpal, CEO of Outlook Asia Capital, says it is not advisable to put money entirely into debt "as chances are that one might run out of his/her corpus."

"They have to plan for next 20-25 years as the life expectancy has increased significantly. It is advisable that a person puts at least 20-25 per cent in equities," he added. Capital gains from equity mutual funds are tax free after one year.

Annuity plans: Annuity schemes are basically pension plans offered by insurance companies in which a person makes lumpsum investment to draw a regular income. Annuity plans offer guaranteed return of around 7-7.5 per cent per annum. "It is a good option as one gets guaranteed income for next 25 years of life," said Mr Nagpal. Lovaii Navlakhi, founder and CEO of International Money Matters, says, "The biggest risk of higher life expectancy should be protected -- an annuity for life, which continues in full/ part for the surviving spouse may solve this problem." However, the interest income that one earns from annuities is fully taxable as per the slab of the person and also the money is locked for the long-term.

Bank fixed deposits: This is one of the most favored investing options in India as there is a guarantee of return, liquidity and capital safety. The interest earned is fully taxable. So the post-tax, post-inflation return might be negligible.

Monthly income plans: These are mutual fund which invests predominantly in debt instruments while part of their investments (15-20 per cent) goes into equity. Capital gains on investments for less than three years are taxed as per the slab of the investor while gains after three years are taxed at the rate of 20 per cent but can be adjusted against cost of inflation, thus reducing the tax impact to negligible levels. Given the tax advantage, experts feel MIPs can be a good option for investors. Investors can systematically withdraw money from these funds for regular income. "MIPs can generate fixed deposit- plus kind of returns, while taking a small risk," said Suresh Sadagopan , founder of Ladder7 Financial Advisories.

Corporate fixed deposits: These deposit schemes are offered by corporates and non-banking housing finance companies which offer interest rate higher than that of bank deposits. HDFC fixed deposits are highly rated and offer 1 per cent more than the normal bank deposits, said Mr Nagpal. But investors should "invest in high rated corporate deposits" said Anil Rego, CEO and Founder of Right Horizons.

Co-operative banks deposits can also be an option as they offer fixed deposits interest rate of around 9 per cent per year but they are relatively riskier, said Mr Nagpal.