What are CPSE ETFs? You can soon save taxes by investing in them

  • Though there is still no clarity on the product, experts say this is a good incentive for retail investors
  • There is not much clarity if there will be a new product or ELSS benefits will be provided to the existing one

Mumbai: You can soon save taxes by investing in Central Public Sector Enterprises (CPSE) exchange traded funds (ETF) as the government is set to introduce an equity linked saving scheme (ELSS) route for this purpose. However, the Finance Bill has no mention about this announcement.

“This statement may mean that they want to give retail investors some incentive to participate through Section 80C of the Income Tax Act. The reference to ELSS is because it has become a popular product," said Radhika Gupta, chief executive officer, Edelweiss Asset Management Ltd.

As per the current tax laws, you are entitled to a deduction of up to 1.5 lakh on the amount invested in ELSS. Does that mean there will be a new product for you or will there be changes in the existing ones? “It is difficult to say anything till we have some clarity on whether there will be a new product or changes will be introduced in the existing CPSE-ETF or an additional tranche of an existing CPSE-ETF will be introduced with these additional benefits," said Gupta.

There is no clarity on whether it will be extended to debt and equity ETFs.

“If fixed income is included, there will be a good debt option. Even though there is no fixed income CPSE-ETF yet, there might be new ones in future. In case it is only for equity versions, there will be some additional push for people," she added.

This move definitely has some benefits for investors. “You have more options to take advantage of the 80C benefits. Earlier there were grimmer chances of you to find a product which was there in the 80C bucket with considerable equity exposure," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

However, as investors, you also need to be careful about comparing it with other government-provided products.

“Generally, retail investors are inclined towards comparing government-provided products. For example, this may be compared with small saving schemes like EPF or NSC. What you need to be wary of is that even though it is a government- provided product, it still has equity as an underlying product. So there will be a risk," said Dhawan. “The returns too will be dependent on the performance of the stock," added Dhawan.

Apart from increased retail participation in capital markets, this move will simply increase the flow of disinvestment done through these products. “There is not much clarity if there will be a new product or ELSS benefits will be provided to the existing one,"said Sundeep Sikka, ED and CEO, Reliance Nippon Life Asset Management Ltd. “But, these increased benefits, nevertheless, will bring in more investors, pump money flow and hence more disinvestment will happen," said Sikka.

There is one CPSE ETF in the country right now, managed by Reliance Nippon Life Asset Management Ltd, which was launched on March 2014 and listed in April 2014.

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What are CPSE ETFs?

An ETF is an equity instrument that tracks a particular index and contains stocks, bonds and even commodities

A Central Public Sector Enterprises (CPSE) ETF holds a similar basket of stocks as the Nifty CPSE Index. Eleven central public sector undertakings make up the Nifty CPSE Index and the same PSUS form a part of the CPSE ETF as well, which is being managed by Reliance Nippon AMC

The top four companies: Oil and Natural Gas Corporation of India Ltd (ONGC), NTPC Ltd, Indian Oil Corporation Ltd and Oil India Ltd — make up 77.64% of the fund

However, this is not the original composition of the fund

PSUS such as GAIL (India) Ltd, NTPC, Container Corporation of India (Concor) and Engineers India Ltd were dropped while others like Neyveli Lignite Corp. Ltd (NLC), SJVN and NBCC India were added to the fund

The other three companies in the fund are: Rural Electrification Corporation of India Ltd, Power Finance Corporation of India Ltd and Bharat Electronics Ltd

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