Babar Zaidi | May 8, 2017, 03.15 AM IST | Times of India
Though it was thrown open to the public eight years ago, investors started showing interest in the National Pension System (NPS) only two years ago. Almost 80% of the 4.39 lakh voluntary subscribers joined the scheme only in the past two years. Also, 75% of the 5.85 lakh corporate sector investors joined NPS in the past four years. Clearly, these investors have been attracted by the tax benefits offered on the scheme. Four years ago, it was announced that up to 10% of the basic salary put in the NPS would be tax free. The benefit under Section 80CCD(2d) led to a jump in the corporate NPS registrations. The number of subscribers shot up 83%: from 1.43 lakh in 2012-13 to 2.62 lakh in 2013-14.
Two years ago, the government announced an additional tax deduction of `50,000 under Sec 80CCD(1b). The number of voluntary contributors shot up 148% from 86,774 to 2.15 lakh. It turned into a deluge after the 2016 Budget made 40% of the NPS corpus tax free, with the number of subscribers in the unorganised sector more than doubling to 4.39 lakh. This indicates that tax savings, define the flow of investments in India. However, many investors are unable to decide which pension fund they should invest in. The problem is further compounded by the fact that the NPS investments are spread across 2-3 fund classes.
So, we studied the blended returns of four different combinations of the equity, corporate debt and gilt funds. Ultrasafe investors are assumed to have put 60% in gilt funds, 40% in corporate bond funds and nothing in equity funds. A conservative investor would put 20% in stocks, 30% in corporate bonds and 50% in gilts. A balanced allocation would put 33.3% in each class of funds, while an aggressive investor would invest the maximum 50% in the equity fund, 30% in corporate bonds and 20% in gilts.
Ultra safe investors
Bond funds of the NPS have generated over 12% returns in the past one year, but the performance has not been good in recent months. The average G class gilt fund of the NPS has given 0.55% returns in the past six months. The change in the RBI stance on interest rates pushed up bond yields significantly in February, which led to a sharp decline in bond fund NAVs.
Before they hit a speed bump, gilt and corporate bond funds had been on a roll. Rate cuts in 2015-16 were followed by demonetisation, which boosted the returns of gilt and corporate bond funds. Risk-averse investors who stayed away from equity funds and put their corpus in gilt and corporate bond funds have earned rich rewards.
Unsurprisingly, the LIC Pension Fund is the best performing pension fund for this allocation. “Team LIC has rich experience in the bond market and is perhaps the best suited to handle bond funds,” says a financial planner.
The gilt funds of NPS usually invest in long-term bonds and are therefore very sensitive to interest rate changes. Going forward, the returns from gilt and corporate bond funds will be muted compared to the high returns in the past.
In the long term, a 100% debt allocation is unlikely to beat inflation. This is why financial planners advise that at least some portion of the retirement corpus should be deployed in equities. Conservative investors in the NPS, who put 20% in equity funds and the rest in debt funds, have also earned good returns. Though the short-term performance has been pulled down by the debt portion, the medium- and long-term performances are quite attractive.
Here too, LIC Pension Fund is the best performer because 80% of the corpus is in debt. It has generated SIP returns of 10.25% in the past 3 years. NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure.
These funds have also done fairly well, beating the 100% debt-based EPF by almost 200-225 basis points in the past five years. Incidentally, the LIC Pension Fund for Central Government employees is the best performer in that category. Debt-oriented hybrid mutual funds, also known as monthly income plans, have given similar returns.
However, this performance may not be sustained in future. The equity markets could correct and the debt investments might also give muted returns.
Balanced investors who spread their investments equally across all three fund classes have done better than the ultra-safe and conservative investors. The twin rallies in bonds and equities have helped balanced portfolios churn out impressive returns. Though debt funds slipped in the short term, the spectacular performance of equity funds pulled up the overall returns. Reliance Capital Pension Fund is the best performer in the past six months with 4.03% returns, but it is Kotak Pension Fund that has delivered the most impressive numbers over the long term. Its three-year SIP returns are 10.39% while five-year SIP returns are 11.22%. For investors above 40, the balanced allocation closely mirrors the Moderate Lifecycle Fund. This fund puts 50% of the corpus in equities and reduces the equity exposure by 2% every year after the investor turns 35. By the age of 43, the allocation to equities is down to 34%. However, some financial planners argue that since retirement is still 15-16 years away, a 42-43-year olds should not reduce the equity exposure to 34-35%. But it is prudent to start reducing the risk in the portfolio as one grows older.
Aggressive investors, who put the maximum 50% in equity funds and the rest in gilt and corporate bond funds have earned the highest returns, with stock markets touching their all-time highs. Kotak Pension Fund gave 16.3% returns in the past year. The best performing UTI Retirement Solutions has given SIP returns of 11.78% in five years. Though equity exposure has been capped at 50%, young investors can put in up to 75% of the corpus in equities if they opt for the Aggressive Lifecycle Fund. It was introduced late last year, (along with a Conservative Lifecycle Fund that put only 25% in equities), and investors who opted for it earned an average 10.8% in the past 6 months.
But the equity allocation of the Aggressive Lifecycle Fund starts reducing by 4% after the investor turns 35. The reduction slows down to 3% a year after he turns 45. Even so, by the late 40s, his allocation to equities is not very different from the Moderate Lifecycle Fund. Critics say investors should be allowed to invest more in equities if they want.
HARSH ROONGTA | Tue, 13 Sep 2016-06:35am | dna
Despite all this, the detractors of NPS are many and the reasons are fairly significant.
On paper, National Pension System(NPS) has everything going for it. It is an extremely low-cost retirement mutual fund with fund management fees at very low levels. It also allows equity participation up to a maximum of 50% and requires the balance money to be invested in government and debt securities. This provides a healthy mix of high return equity with safe debt instruments. NPS also effectively locks in the investors’ money till they reach the age of retirement. This ensures that the investor does not take any short decision for this investment. It also allows the fund manager to invest with a longer-term horizon in mind, thus allowing better returns. The star advantage, of course, is the exclusive tax deduction of Rs 50,000 for investing in NPS which is over and above the Rs 1.50 lakh limit available under section 80C for other investments and expenses. For salaried employees, the employer can contribute up to 10% of the basic pay into the NPS without payment of tax. What should clinch the argument is the fact that the average return over the past 5 years is a creditable 12% per annum even if you had chosen in the worst-performing equity and debt funds available in the NPS.
Despite all this, the detractors of NPS are many and the reasons are fairly significant. First is the requirement for compulsory investment in buying an immediate pension plan from a life insurance company with at least 40% of the accumulated fund. The immediate pension plans available from life insurance companies are very limited and offer very poor returns around 7% p.a., which is also taxable. Second is the fact that out of the balance 60% (left after investing in compulsory pension plan) only 40% of the accumulated fund can be withdrawn tax free. The balance 20%, if withdrawn, will be taxable, thus reducing the return. Questions have also been raised about the very low fees that fund managers get which may affect the performance of the fund in the long run.
The argument for or against NPS thus rallies around whether the exclusive tax benefit provided initially outweighs the disadvantages of NPS at maturity. Proponents of NPS (and I am one of them) argue that the fears of taxation on the pension income are overstated as the income is spread over many years and you are likely to have low income in your retirement years leading to low or nil taxation rates. Also, the immediate annuity market cannot remain underdeveloped forever and should start offering competitive returns by the time you retire in a decade or more. Also, given the government’s commitment to promoting the NPS, the tax disadvantages of NPS are likely to reduce or disappear over time. The biggest advantage for unsophisticated investors is that the initial tax benefit will ensure that they diligently invest year after year which they may not otherwise do in a regular investment product.
Of course, I think both sides agree that investing in NPS over and above the exclusive tax benefit available for it makes no sense whatsoever currently. So invest in NPS, but only to the extent of the exclusive tax benefit available.
The writer is a chartered accountant and Sebi-registered investment adviser
Source : https://goo.gl/hd8xbA
K. R. SRIVATS | NEW DELHI | AUGUST 22, 2016 | The Hindu Businessline
Discussion paper likely in a month, says PFRDA member
If you are a National Pension System subscriber, soon you may get to dip into the pot for a home loan and realise the dream of having ‘pension with a house’ on retirement.
The Pension Fund Regulatory & Development Authority (PFRDA) is toying with the idea of allowing NPS funds to be used to support home loan needs of subscribers, said RV Verma, Member, PFRDA.
The regulator feels an NPS subscriber should be allowed to use the NPS corpus either directly or as a collateral for financing the house. This will be an improvement over the current regime, where any premature withdrawal means diminishing of balance.
“We are preparing a discussion paper on ‘Housing for NPS Subscribers’. Rather than allowing NPS contributions to flow into the capital market or specified securities, the same could also be used for supporting home loan needs of NPS subscribers. This discussion paper is expected to be ready in a month,” Verma told told BusinessLine here.
Any move to allow pension funds to be used for financing a home is expected to “reduce homelessness” in the country and is in line with the government’s objective of ‘Housing for All by 2022’. This facility will be available across the entire NPS subscriber universe — both government employees and non-government individual subscribers.
This idea of allowing NPS monies to fund home purchase could be a win-win for the government and subscribers. Besides pension and a house, subscribers will get fiscal benefits by way of tax breaks for contributing to the NPS corpus and also for repayment of housing loan principal and interest.
For the government, the benefit comes in terms of reduced allocation from the fisc towards house building advance, Verma said.
As on date, an NPS subscriber is allowed partial withdrawal — capped at 25 per cent of the contribution if he has been with the scheme for at least 10 years.
Babar Zaidi | May 16, 2016, 03.14 AM IST | Times of India
When Avinash Chandnani invested in the National Pension System (NPS) last year, he planned to put money in five different pension funds.However, when he was putting the second tranche of `10,000 in another fund, he realised that NPS investors can’t opt for two pension fund managers. He also couldn’t switch to another pension fund for a year.
Our story examines the performance of Tier I funds of the NPS and identifies the best pension funds. The performance of individual schemes does not give an accurate picture because investors put money in a combination of funds. So we looked at blended returns of four combinations of the equity, corporate debt and gilt funds.
Chandnani, for instance, is an aggressive investor, with 50% of his corpus in the equity fund, 30% in the corporate bond fund and 20% in the gilt fund. A balanced allocation would put 33.3% in each of the three funds. A conservative investor would put only 20% in stocks, 30% in corporate bonds and 50% in gilts. The ultra-safe investor would not invest in equities, put 40% in corporate bond fund and 60% in gilt.
The past 9-12 months have not been kind to aggressive investors. While bond prices have risen, the 50% allocated to equities has dragged down returns. But ultra-safe investors who stayed away from stocks or conservative investors who put only 20% in equity funds have earned good returns.
Playing safe has also helped NPS funds for government employees. These funds can invest up to 15% in equities but most have 8-10% allocated to stocks. They have given double-digit returns, thanks to interest rate cuts that have enhanced the value of long-term bonds.
Should you switch from EPF to NPS?
The healthy returns from the NPS come at a time when the interest rate of the EPF is being debated and the interest rate for PPF has been pruned to 8.1%. So, should you shift your retirement savings to the NPS?
A legislation to amend the Employees’ Provident Fund & Miscellaneous Provisions Act has been framed. The amendment allows EPF subscribers to make a switch to the NPS. Once he shifts to NPS, the employee will have a onetime chance to return to the EPF fold. The amendment also seeks to ensure that employers don’t force a scheme down the throats of employees.
However, the tax treatment of the NPS may prove a hurdle. While the EPF corpus is tax-free, this year’s Budget has proposed to make 40% of the NPS corpus tax-free. There is another problem. At least 40% of the NPS maturity corpus has to be put in an annuity to earn a monthly pension. Annuity rates in India are very low compared to what other options can offer. However, investors will face that issue much later. Right now, we identify the best performing funds for various types of investors.
ULTRA SAFE INVESTORS
Whether they invested through SIPs or a lump sum, risk-averse individuals have earned the highest returns. They stayed away from stocks and divided their NPS corpus between gilt funds and corporate debt funds. On average, gilt funds have given 9.75% annualised returns while corporate debt funds have churned out more than 11% in the past five years. Even in the short term, safe investors have been the biggest gainers.
Will the good times continue? The gilt funds of NPS are holding long-term bonds with an average maturity of over 19 years and a modified duration of about nine years. These funds have done well because interest rate cuts have pushed down bond yields. But experts say this trend will not stay forever. “Over a longer period, the portfolios will deliver returns similar to the yieldto-maturity of bonds in the portfolios,” says Manoj Nagpal of Outlook Asia Capital. The average yield-to-maturity of the bonds is 8%, which is higher than the PPF rate but lower than EPF. The average yield-to-maturity of corporate debt funds is higher at 8.25%, and their average tenure is also shorter at seven years. Ultra-safe investors should consider higher allocation to these funds.
Investors who allocated a small portion of their corpus to equity funds have also earned good returns. The best performing ICICI Prudential Pension Fund has given double-digit returns over 5 years.
Including 15-20% equity in your retirement portfolio is a sound strategy as an ultra-safe portfolio won’t be able to beat inflation in the very long-term. NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure.
These funds have also done fairly well. However, younger investors should not play too safe. They can afford to have a larger portion of their NPS corpus in equity funds. Also, it shouldn’t be assumed that bond funds won’t lose money. If interest rates rise, the NAVs of gilt funds holding long term bonds will slip.
Investors who spread their money across all three types of funds have not done too badly. Here again, the shortterm picture is rather bleak. But the medium- and long-term returns are reasonably attractive. ICICI Prudential Pension Fund is again the best performing fund for this allocation, with returns of 9.85% in the past five years.
The balanced approach, which puts 33.3% in each of the three classes of funds, suits most investors. It has the potential to give reasonably good returns in the long term without taking too much of a risk. The investor will need to change his allocation as retirement nears. There are several theories about how much the allocation to equities should be at different ages. Some planners say that it should be 100 minus your age. But the maximum equity allocation in the NPS is 50%. Besides, you might also have invested in other instruments for your retirement.
Investors who can’t take a decision should opt for the lifecycle fund of the NPS. Under this option, the investor’s age decides the equity exposure. The 50% allocation to the equity fund is reduced every year by 2% after the investor turns 35, till it comes down to 10%. The rebalancing happens every year. The PFRDA is considering more asset mix options for these lifecycle funds.
Equity funds of the NPS have not done too well. They have lost money in the past year and delivered lower returns than corporate debt and gilt funds in the past five years. This has dragged down the returns of aggressive investors who allocated 50% to equity funds. But this should not make investors ban this critical asset class from portfolios.
Till last year, equity funds were mirroring the returns of the index because pension funds were supposed to invest in proportion to their weight in the index. But from September 2015, fund managers have been allowed to invest in a larger universe of stocks and follow an active investment strategy that does not mirror the index.
Experts see this as a positive development because a predominantly largecap orientation would have prevented the NPS equity funds from beating the market. More importantly, poor quality index stocks can now be dropped.
Chandralekha Mukerji | Apr 25, 2016, 05.13 AM IST | Times of India
It is the time for annual appraisal letters and the bonus. Many of you might have got your tax refunds too.
While you may be happy to have some extra cash, handling it can be tricky. You need to juggle multiple aims and concerns to maximize your yearly perk. Here are suggestions for getting the most from that extra money .
OPTION 1: Reduce your debt burden
Before you start investing your surplus, pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt in the order of interest rates. The ones with no tax benefits and higher interest cost should be paid off first. Loans that offer tax benefits should be the last on your list.
OPTION 2: Invest in National Pension Scheme (NPS)
Upto Rs. 50,000 invested in the NPS, under Section 80CCD (1b), can be claimed as deduction, over and above the Rs1.5 lakh investment deduction limit under Section 80C. At the highest tax bracket of 30%, this could mean a savings of Rs 15,000 on your next tax bill. Under NPS, it is mandatory to buy an annuity plan with 40% of the corpus at maturity . The remaining 60% can be withdrawn. The Finance Minister has made withdrawals up to 40% of the corpus tax exempt, adding to NPS’ appeal.
OPTION 3: Increase equity exposure
The Sensex has fallen around 12% in the past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and use a systematic transfer plan to move the money into equity funds. You could also earmark this corpus for a goal that is 5-10 years away. For instance, you can use the money towards increasing your down payment for an asset purchase and reduce your future loan burden.
OPTION 4: Invest for your daughter
If your daughter is less than 10 years old, Sukanya Samriddhi Yojana (SSY) is the best debt option to invest in for her future. At 8.6% yearly compounded rate, this is among the highest paying small savings schemes. Investment in SSY is tax deductible under Section 80C, and you can invest up to Rs1.5 lakh per financial year. The principal invested, the interest accumulated and the payout are all tax-free. However, you have to stay invested till your child turns 21.
OPTION 5: Build corpus to buy a house
An extra Rs. 50,000 in tax break has been introduced for first-time home buyers where loan amount is less than Rs 35 lakh and the property’s worth is not more than Rs 50 lakh. Use the bonus to increase the size of your down payment. It will bring down your loan requirement, which means lower EMIs and, if it falls below Rs 35 lakh, there’s the extra tax benefit as well. Put the bonus in an income fund if purchase is less than a year away.
OPTION 6: Build an emergency corpus
If you do not have an emergency fund, you should use your bonus to build one.You should invest the money in highly liquid options such as short-term debt funds. The corpus will help you manage sudden, unplanned expenses.
Source : http://goo.gl/QPXcFx
By Babar Zaidi, ET Bureau | Mar 14, 2016, 10.30 IST | Economic Times
The 31 March deadline is barely two weeks away, but many taxpayers are yet to sew up their tax planning for the year. Either they were unfamiliar with the tax rules, confused by the array of options or just plain lazy. Whatever be the reason, they are now sitting ducks for unscrupulous distributors and financial advisers who capitalise on the approaching deadline and palm off high-cost investments to unsuspecting investors.
This week’s cover story is aimed at taxpayers who still have to invest under Section 80C. As a first step, calculate how much more you need to invest. Many taxpayers don’t know that tuition fees of up to two children is eligible for deduction under Section 80C. For many parents with schoolgoing children, this takes care of a large portion of their tax-saving investment limit.
Also, the principal portion of the home loan EMI and the stamp duty and the registration charges paid for a house bought during the year are all eligible for the deduction. If they include the contribution to the Provident Fund and premiums of existing insurance policies, they might discover that their tax planning is nearly taken care of. Use the table provided to calculate how much more you need to invest this year.
Put small amount in ELSS
Your approach now should be different from what we advised earlier this year. In January, we had listed ELSS funds as the best tax-saving instrument. They are low on charges, fairly transparent, offer high liquidity, the returns are tax-free and they have the potential to create wealth. Also, you are under no compulsion to make subsequent investments. Investing in ELSS funds is easy because you can apply online. Many fund houses even pick up KYC documents from your residence. You can also get your KYC done online.
However, at the same time, studies have shown that a staggered approach works best when investing in equity funds. It’s too late to take the SIP route in March and investing a large sum at one go can be risky. Investors who took the SIP route in top ELSS funds in 2014-15, have made money, but those who waited and invested lump sum in March 2015 are saddled with losses.
Unfortunately, not many investors understand the simple logic behind SIPs. Barely 15% of the total inflows into the ELSS category comes through monthly SIPs and nearly 25% of the total inflows are invested as lump sum in March. We suggest that you avoid putting a large sum at one go in ELSS funds and put only a small amount at this stage. It’s best to start an SIP after April in a scheme with a good track record.
PPF and FDs are safe bets
Unlike the ELSS funds, you can invest blindly in the PPF. If you already have a PPF account, just put the remaining portion of your Section 80C limit in it and be done with it. Opening a new account at this stage may not be feasible if you have to submit the proof of investment this week. Even if you manage to open an account, you will be cutting it too fine. If your investment cheque is not encashed by 31 March due to any reason, you may be denied the deduction for this year. Some banks like ICICI Bank allow online investments in the PPF, which is a better option than the offline route.
If you don’t have a PPF account, go for tax-saving fixed deposits or NSCs. They did not score very high rank in our ranking of tax saving instruments in January because the interest is fully taxable, which brings down the effective post-tax returns in the 30% tax bracket to less than 6%. However, with just two weeks left to go, they could be good options to save tax in a hurry. Sure, you will earn low returns, but there are no hidden charges or any compulsion to invest in subsequent years.
They will push you to buy insurance policies that can become millstones around your neck. Don’t sign up for insurance policies in a hurry. To make things easier for the buyer, the agent even does the paperwork. All the buyer has to do is sign the application form and write a cheque. But any investment that requires a multi-year commitment must be assessed in detail, so don’t let the agent force you into a decision.
In our January ranking, life insurance policies were at the bottom of the heap. Experts say it is not a good idea to mix insurance with investment. Buy a term plan for insuring yourself and invest in other more lucrative options than a traditional insurance policy that offers 6-7% returns. A costly insurance policy prevents you from investing for other goals. If you are paying a very high premium, it is advisable to turn the policy into a paid up plan. The insurance cover will continue but you can stop paying the premium.
Pension plans from insurance companies also rank very low. Even though 33% of the corpus was tax free on maturity, the low-cost New Pension System (NPS) was seen as a better alternative. Last year, the government announced an additional deduction of Rs 50,000 for investments in the NPS. This year’s Budget has made the scheme more attractive by making 40% of the corpus tax free on maturity.
Till a few months ago, opening an NPS account was considered an uphill task. You had to run around for weeks, even months, before the account became operative. This has now changed. Turn to Page 6 to know how you can take the online route to open an NPS account in just 25-30 minutes.
No proof? No problem
Salaried taxpayers are expected to submit proof of investment to their employers by mid-March. That window is nearly closed now. If you have not submitted the proof of your tax saving investments, TDS will be deducted from your March salary. But don’t let that stop you from investing now. If you are able to invest by 31 March, you can claim a refund of the excess tax deducted from your salary. However, you will get that money back only when you file your tax return in July.
Source : http://goo.gl/gZZqCR
By Babar Zaidi, ET Bureau|Mar 07, 2016, 06.33 AM IST | Economic Times
NEW DELHI: HR managers and CFOs struggling to retain talent without escalating wage costs might get help from an unlikely source this year. If companies roll out the New Pension System (NPS), their employees can save additional tax of up to 1-3% of their basic salaries. If a company puts 10% of the basic salary of an employee in the NPS, that amount can be claimed as a deduction under Sec 80CCD(2). This tax deduction is over and above the Rs 1.5 lakh under Section 80C and the new deduction of Rs 50,000 introduced last year under Section 80CCD(1b).
The NPS benefit can be rolled out along with the Employees’ Provident Fund. A company has to just rejig the compensation structure of its employees by including the contribution to the NPS in their total cost-to-company (CTC). The tax deduction is capped at 10% of the basic salary of an individual.
“A person with a basic salary of Rs 50,000 a month can reduce his annual tax outgo by up to Rs 12,360,” says Sudhir Kaushik, co-founder of Taxspanner.com (see table).
To be sure, the benefit under Sec 80CCD(2) is not new. It was introduced four years ago but has not found many takers in the industry.
Though a few large companies, including Wipro, offer this benefit, most others have ignored the measure because it entails changing the pay roll structure. “The NPS idea has to be first sold to the company before it can be offered to the individual.
Within companies there are multiple departments to be convinced,” says CR Chandrasekar, CEO of Fundsindia.com.
Another reason for the lukewarm response was the poor tax efficiency of the NPS. Up to 40% of the maturity corpus is mandatorily put in an annuity and the balance 60% was taxable. This year’s Budget has proposed to make 40% of the NPS maturity corpus tax free. That might nudge employers to include the NPS as part of their CTC structure. “They can reduce some taxable component of the pay package and put 10% of the basic salary into the NPS,” says Manoj Nagpal, CEO of Outlook Asia Capital.
If a company decides to roll out the NPS, the process is surprisingly simple. It just needs to register as a corporate with the National Securities Depository Ltd and submit a few documents. “The whole process takes barely 3-4 days,” says Sumit Shukla, CEO of HDFC Pension Fund.
But offering the benefit is one thing and convincing employees to opt for it is quite another. The NPS is a market-linked product which doesn’t guarantee returns. While putting 10% of the basic pay in the NPS will certainly cut tax, it will also reduce the take-home pay of the individual. Besides, individuals who opt for the benefit will also be sacrificing liquidity. The NPS corpus can be withdrawn only at the time of retirement or for specific emergency needs.
Meanwhile, last year’s budget had talked of giving employees the option to switch from the Employees’Fund to the NPS. This year’s budget has even proposed a one-time tax exemption for such a switch. But observers say these measures have little meaning until the EPF Act is amended to allow such a transfer.
Source : http://goo.gl/kNpSbP