1. NPS, PPF, Tax-free bonds: All you need to know before investing

NPS, PPF, Tax-free bonds: All you need to know before investing

The National Pension Scheme or System (NPS), an important financial product launched in the year 2009 by the government, still needs to make a mark in the investment world.

By: | Published: July 18, 2016 4:59 PM
NPS, PPF, Tax-free bonds: All you need to know before investing Tax payers who are planning retirement should consider making long term investments that will give them good retirement benefits. (Photo: Reuters)

The National Pension Scheme or System (NPS), an important financial product launched in the year 2009 by the government, still needs to make a mark in the investment world. Many investors still prefer the trust old Public Provident Fund (PPF) and aren’t aware of the NPS and its many benefits.

One segment is of the opinion that the NPS is not suitable for investment as the pension is taxable on maturity. The NPS contribution system is like an LIC insurance policy or the popular PPF scheme. NPS falls under the Exempt-Exempt-Taxable (EET) basket, which means that you can avail tax deduction if you invest your money in it.

Tax payers who are planning retirement should consider making long term investments that will give them good retirement benefits. NPS has been designed with dual benefits: tax saving and wealth accumulation for the future. On retirement a good percentage of the withdrawn money can be utilized to buy annuity or other pension policies for a steady income.

As per the 2015 budget, those who invest in NPS can avail an additional tax deduction of Rs 50,000 (over and above the Rs. 1,50,000) under section 80 CCD(1B) of the Act for NPS subscribers under individual model.

Meanwhile, the 2016 budget has proposed a 40% of the corpus that will be tax free. The PPF scheme here scores better as it is free from taxation on gaining maturity.

One can make a pre-mature exit from NPS though there is no change in the taxation policy. As per the new revised withdrawal and exit rules, one can withdraw a partial amount in case of certain emergencies.

When it comes to fund management the NPS will cost you only Rs.10 as a fund charge, which is quite low compared to the other mutual funds and ULIP charges that is around Rs 1500-2500 for a corpus of Rs 1 lakh every year.

By far, the NPS is one of the cheapest investment products that people from all sectors and income groups can rely on. The only step that the government needs to do is build awareness about the instrument.

Government is making a tremendous effort to attract investors to NPS. However, due to low commission paid to the agents and financial companies the scheme is not gaining as much ground as the PPF.

“Since pension funds are not making money, they can’t spend on investor awareness activities. Even if the fund management charges are raised to 0.25% per year, NPS will remain the cheapest investment product. It will be a win-win for all,” says Sumit Shukla, CEO of HDFC Pension Funds.

NPS is undoubtedly quite a systematic method for wealth accumulation that is promoted and regulated by the Government of India.

One can also invest in other popular tax-free bonds that are provided by HUDCO, Indian Railways Finance Corporation (IRFC), NTPC, PFC, SBI, LIC, etc. are also issued for long term investments and are fully exempted from tax.

These bonds are beneficial for those who seek a steady annual income and can invest a sum for a long period. The interest rates are exempted from tax. However, the risk factor is that these tax-free bonds are linked to the current rates of the market and hence keep changing. Your interest amount will be based on the current market rate and not on the starting interest rate. Investors will receive the interest annually and the amount is credited directly to the investors registered bank account.

If an investor decides to sell any bonds within a year’s subscription, then one may have to pay a Short Term Capital Gain amount at a normal market rate. However, if you want to sell a bond after one year of subscription then you will have to pay long-term capital gains at a 20% tax deduction rate.

The biggest challenge with tax-free bonds is that the liquidity amount is very low due to the fact that these are traded through the stock exchange. Due to poor liquidity and returns most investors stick to the Employees Provident Fund (EPF) and the NPS systems.

Life insurance companies offer several types of pension plans. However, they, too, have not been able to impress investors in terms of returns.

With the IRDA (Insurance Regulatory and Development Authority) banning partial withdrawal from the insurance policies, investors are showing more interest in the NPS schemes and fixed deposit schemes where partial withdrawal is manageable.

The tax-free bonds can be availed in physical form through a demat account, once they are open for subscription. A subscriber needs to furnish his/her PAN card details to the issuer of the bonds during the Public issue or through the stock exchange.

Finally, focus on whether an investment done has helped you to achieve your long time financial goals or not. Any kind of investment especially tax-free bonds that are subject to market risk should be made wisely and without haste.

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