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
By Yogima Sharma, ET Bureau | Mar 10, 2016, 07.00 AM IST | Economic Times
NEW DELHI: Finance Minister Arun Jaitley may have been forced to back down on taxing Employees’ Provident Fund (EPF) withdrawals a week after introducing the measure in the Budget, but the government has not given up on the goal of creating a pensioned society.
It’s now considering a proposal to make it mandatory for employers to route most of their share toward the retirement savings of employees into the Employee Pension Scheme (EPS) rather than EPF for employees above the salary threshold of Rs 15,000 per month, an official said. Aprivate sector employer matches contributions made by an employee to EPF — 12% of basic salary by each. While all of the employee’s contribution goes to EPF, 8.33% of the employer’s payment goes to EPS subject to a maximum of Rs 1,250 a month.
That’s 8.33% of Rs 15,000, the statutory limit for contributions. These and other EPS conditions may change if the proposal is implemented wherein those earning more than Rs 15,000 a month will see a higher share of the employer’s contribution going to EPS.
Changing the rule on the employer’s contribution would mean that a substantial portion of this would go toward a pension for the employee, rather than getting withdrawn at one shot from the EPF at retirement. This will maintain parity between EPF and the General Provident Fund as the former will continue to enjoy exempt-exempt-exempt (EEE) status at the stages of investment, accumulation and payout. “This proposal was discussed at a highlevel meeting in the PMO last week,” said the senior government official cited above. He was one of those who attended the meeting.
There was near agreement that this would be a better way to move toward a pensioned society, according to the official, who did not wish to beidentified. “Government does not want to go wrong this time and we would ensure that there are extensive consultation with all stakeholders on the proposal,” the official added.
On Tuesday, Jaitley scrapped his Budget proposal to tax EPF withdrawals unless the subscriber bought an annuity, saying that the government wanted to undertake a comprehensive review. This followed a backlash against the move from those who would be affected despite the government explaining that it wanted to discourage people from taking out all their money in one shot and ensure that they had a steady income over the remainder of their lives.
The EPS proposal was welcomed by tax experts.
“Making employers contribute to EPS is a more sensible decision that will help the government (succeed in) its objective of creating a pensioned society,” said PwC personal tax leader Kuldeep Kumar. Kumar is of the view that the government should restore an EPS feature that was discontinued two years ago and change the provisions of the scheme so that defined benefits are given only to those in the low-income segment.
The government used to contribute 1.16% to the pension kitty of every EPF member as part of EPS run by the EPFO to offer a pension for life after the age of 58. In September 2014, EPFO withdrew this subsidy for those earning above the threshold of Rs 15,000 per month.
Source : http://goo.gl/Hbxzaj
Babar Zaidi | TNN | Jan 11, 2016, 08.57 AM IST | Times of India
Do-it-yourself tax planning can be rewarding and challenging. Rewarding, because you can choose the tax-saving instrument that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters—returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.
While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!
ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency. The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.
If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund. Last year was not good for equities, and even top-rated ELSS funds lost money. However, the funds are miles ahead of PPF in 3- and 5-year returns.
The SIP route is the best way to contain the risk of investing in equity funds. However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.
Opt for the direct plan. Returns are higher because charges are lower.
The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What’s more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.
Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.
The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of Rs 50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.
Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity. Right now, the income from annuities is taxed at the normal rate.
Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.
PPF AND VPF
It’s been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.
Allocate 25% of your pay hike to VPF. You won’t notice the deduction.
SUKANYA SAMRIDDHI SCHEME
This scheme for the girl child is a great way to save tax. It is open only to girls below 10. If you have a daughter that old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Accounts can be opened in any post office or designated branches of PSU banks with a minimum Rs 1,000. The maximum investment in a financial year is Rs 1.5 lakh and deposits can be made for 14 years. The account matures when the girl turns 21, though up to 50% of the corpus can be withdrawn after she turns 18.
Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.
SENIOR CITIZENS’ SCHEME This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a Rs 15 lakh overall investment limit.
If you want ot invest more than Rs 15 lakh, gift the amount to your spouse and invest in her name.
BANK FDS AND NSCs
Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the Rs 15 lakh limit in the Senior Citizens’ Saving Scheme.
Invest in FDs and NSCs if you don’t have time to assess the other options and the deadline is near.
Pension plans from insurance companies still have high charges which makes them poor investments. They also force the investor to put a larger portion (66%) of the corpus in an annuity. The prevailing annuity rates are not very attractive. Pension plans launched by mutual funds have lower charges, but are MFs disguised as pension plans. Moreover, they are debtoriented plans so they are not eligible for tax benefits that equity plans enjoy.
Invest in plans from mutual funds. They offer greater flexibility than those from life insurers.
Traditional life insurance policies remain the worst way to save tax. Still, millions of taxpayers buy these policies every year, lured by the “triple benefits” of life insurance cover, longterm savings and tax benefits. Actually, these policies give very little cover. A premium of Rs 20,000 a year will get you a cover of roughly Rs 2 lakh. The returns are very poor, barely 6% if you opt for a 20-year plan. And the tax-free income is a sham. Going by the indexation rule, if the returns are below the inflation rate, the income should anyway be tax free. The problem is that once you sign up for these policies, they become millstones around your neck.
If you can’t afford to pay the premium, turn your insurance plan into a paid-up policy.
The Finance Ministry will go through a proposal seeking a hike in the investment limit of pension funds by up to 50% and then refer the matter to an expert committee, PFRDA has said.
Sunday, 11 October 2015 – 11:58am IST | Place: New Delhi | Agency: PTI
The Finance Ministry will go through a proposal seeking a hike in the investment limit of pension funds by up to 50% and then refer the matter to an expert committee, PFRDA has said.
“We are discussing it. They (Finance Ministry) will go through it and then probably refer it to somebody (committee or expert group) to increase investment limit of pension fund into equity market,” PFRDA chairman Hemant G Contractor told PTI.
The Pension Fund Regulatory and Development Authority of India (PFRDA) has sought approval of Finance Ministry to raise the limit of government employees’ pension funds in the stock market up to 50%.
Currently, the pension funds under PFRDA is allowed to invest up to 15% of the corpus into stock market.
Contractor said state and central government employees should be allowed to invest more in equity market.
“They should also get the same exposure to the stock market as the employees of private sector get which is at 50%,” he added.
The raise in investment limit into equity market is one of the recommendations of the G N Bajpai committee stating the investment of pension funds into stocks market should be enhanced.
PFRDA had set up an expert panel under the chairmanship of ex-Sebi chief G N Bajpai to review investment guidelines for National Pension System (NPS) schemes in private sector.
Contractor said equity in the long run is always better performing than other instruments.
The Bajpai committee has recommended diversifying investment portfolio of NPS scheme into private equity and venture capital funds.
PFRDA regulates NPS which is subscribed by employees of both central and state governments, besides private institutions and unorganised sectors.
At present, NPS funds can be invested in government securities, corporate bonds and equities.
The Centre had introduced the New Pension System (NPS) in January 2004.
Total assets managed under NPS are about Rs 82,000 crore, while the private sector’s contribution is just Rs 5,000 crore.
Source : http://goo.gl/SQqiDy
TNN | Sep 3, 2015, 06.25AM IST | Times of India
The government, with an objective of creating a credible counterbalance to foreign funds in the stock market, is getting several smaller pension funds controlled by it to follow the Employees’ Provident Fund Organisation (EPFO) to invest part of their corpus in the stock market. Last month, for the first time in its 64-year history , EPFO, which manages over Rs 8.5 lakh crore worth of funds for salaried employees, started investing 5% of its incremental inflows (about Rs 400 crore per month) in stocks.
“Coal Miners Pension Fund, Seamen’s Provident Fund Organisation, Assam Tea Planters’ Fund, Jammu & Kashmir employees’ pension fund and several other such funds are now talking to Sebi for investing in stocks,” a senior Sebi official said.”The overall strategy for the government, to get domestic pension funds to invest in the equity market, is to have in place an institutional money pool which could be a counterbalance to FPIs,” the Sebi official said. FPIs, or foreign portfolio investors, mainly constitute foreign institutional investors (FIIs) and also include foreign individual investors and other investors of non-Indian origin.
Such a strategy to create a large pool of domestic institutional investors is necessitated by the fact that often, because of domestic or global factors that could be fundamental or technical in nature, foreign funds start buying or selling in the Indian market. This, in turn, leads to substantial volatility in the Indian market. To check such abrupt and sharp volatility , the government wants to have in place a large pool of long-term domestic institutional money , the Sebi official said.
As of now, mutual funds have around Rs 3 lakh crore in equities while another Rs 5 lakh crore is with insurance companies and other institutions. The combined equity investment figure of these domestic institutions nearly equals the total equity holdings of FPIs. Yet, selling by FPIs leaves a major impact on the stock market because they can take money out of India while domestic institutions cannot. The government wants a cushion that is able to balance out selling by FPIs even on a major scale.
Last month, EPFO started investing in the stock market through two of SBI Mutual Fund’s exchange-traded funds (ETFs), one each on nifty and sensex indices. To tap the long-term pension money from these PF funds, mutual fund houses are also launching ETFs, with UTIMF being the latest to open a sensex and a nifty ETF. LICMF and IDBI Bank have also filed their documents with Sebi.
Although EPFO has the leeway to invest up to 15% of its incremental corpus in stocks, it has started with 5%.Fund industry players said that other smaller PFs, which are also talking to Sebi to start investing in the stock market, will not take any extra risks in such investments and follow the EPFO model and stick to 5% now.
Source : http://goo.gl/ZZjpjs