Portfolio

NPS is a must-have, now

K Venkatasubramanian | Updated on January 24, 2018

Golden egg

With higher tax breaks, this low-risk, low-cost product is a winner



It is a Budget for savers, the Finance Minister said. Well, it does appear that you will certainly save on taxes, while focusing on long-term saving through investments in select pension products including those offered by insurance companies.

Besides this, mutual fund investors too would be beneficiaries - a nagging issue of having to pay capital gains taxes on takeover of asset management companies has been done away with.

Here’s how investors in products such as the National Pension System (NPS), annuity products of insurance companies and mutual funds are set to gain.

NPS made attractive

For investors saving for their retirement through the NPS, there is an added incentive to put money in the instrument.

Tax deduction is now available for ₹1.5 lakh, up from ₹1 lakh earlier. Additional deduction to the tune of ₹50,000 for investments is available under section 80CCD.

As a low-risk, low-cost market-linked product, there are now enough reasons to invest in the NPS.

Given its ability to beat standard benchmark indices such as the Sensex and Nifty over the past five years, that too with just 50 per cent investment limit in equity, the NPS is a must-have product now, what with an additional amount of ₹5,000-15,000 (depending on the slab) to be saved in taxes. Additional saving is possible if the 80CCD deduction too is taken.

The best fund managers are ICICI and SBI, as all asset classes (equity, G-sec and corporate debt) have been managed well by these entities.

Now, insurance companies that offer pension products have been given an additional tax incentive. So if you are investing in unit-linked pension plans (ULPPs), you can park ₹50,000 more in them.

But should you? Given the high charges over the first five years (7-9 per cent) and low insurance component, you should ideally avoid them. Again, now that the service tax rate has been increased to 14 per cent from 12.36 per cent, these ULPPs are likely to be affected, though the clarity on the likely impact is yet to emerge.

Though premiums may not go up, the additional service tax is likely to be recovered by proportionately reducing the number of units allotted by the insurance companies.

Relief during MF takeovers

In recent times, we have witnessed some fund mergers with ING and Morgan Stanley exiting their Indian AMC business, selling to Birla Sun Life and HDFC Mutual respectively.

When funds are taken over by other AMCs, investors (who held units for less than a year) even in the selling entity’s equity schemes suffered capital gains tax, as the process is treated as redemption. Short-term capital gains of 15 per cent were levied, even if units were not redeemed.

Systematic investment plans (SIPs) too suffered taxes. The new rules bring in tax ‘neutrality’ as takeover by AMCs and merger of schemes run by one fund house with another is not treated as redemption, and hence does not attract short-term capital gains.

Published on March 01, 2015

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