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Government gives a firm push to NPS

The minister has used subtle and direct methods to encourage NPS investment

There is a perception that equities need not be invested in as you approach retirement. As financial planners, we do believe that with life expectancy increasing, there is a compelling need to invest in growth assets to create a buffer for those years when real interest rates (what you get less the rate of inflation) are negative.

In many ways, the budget presented by finance minister Arun Jaitley on 29 February 2016 seemed to accept the fact as well. While we do not yet have social security of the type that prevails in developed nations, the fact that the budget had a paragraph devoted to creating a pension based society is encouraging. What is even more heartening is the “push" that the National Pension System (NPS) has got. You must know that while the Employees’ Provident Fund (EPF) has limited access to equity investing—and most states are reluctant to allow any—the NPS allows you allocate up to 50% of your balances to equity. The minister has used subtle and direct methods to encourage NPS investment. As much as 40% of the amount withdrawn at time of retirement is exempt from tax, while the rest has to be invested in an annuity. Service tax on single premium annuities has been dropped from 3.5% to 1.4%, while that of annuities under NPS has been exempted from service tax totally. Employer contribution to EPF has been capped at 1.50 lakh per year, so those drawing a basic salary of over 1.05 lakh per month will have a lower employer contribution than 12%. The days of matching contribution by their employer is thus over.

Further, exemption under EPF or superannuation is restricted to 40% of accumulated amount arising from contributions made after 1 April 2016. Without referring to the acronym even once, the EPF has been made partly EET (exempt on investment–exempt on returns–taxed partially on withdrawals). The fear that long-term capital gains on equity will be tampered with by increasing the period to three years from 12 months has thankfully been unfounded.

But if your dividend income exceeds 10 lakh a year, even though the company deducts dividend distribution tax (DDT), you are liable to pay 10% on the entire gross dividends. It does seem mutual fund dividend is not covered; but you may well pay heed to your financial planner’s advice of not planning for cash flow unless you have a specific need. To the extent of promoting long term investment behaviour, I am glad that securities transaction tax on options has been raised three times from 0.017% to 0.05%.

Financial planners know that you can create wealth by either creating more income or reducing expenditure which may not be necessary. The finance minister seems to agree by levying a tax at source for luxury cars above 10 lakh or purchase of goods and services above 2 lakh. Housing is another sector that has not been ignored. Those living in rented houses who are not in receipt of house rent allowance will now have an exemption of 60,000 per annum, up from 24,000. First time home owners seeking loan up to 35 lakh on a property not exceeding 50 lakh will get an additional tax rebate of 50,000. From a quick first glance of the budget, it does seem that there are so many aspects that a financial planner can cover in his conversations with his clients. Thank you, Mr Finance Minister for that.

Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt. Ltd.

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