Budget 2018: India Economic Survey 2017-18 is out and it’s time for Finance Minister Arun Jaitley to present the Modi government’s Union Budget in Parliament. Various tax saving investment avenues carries varied features of safety, flexibility, liquidity, returns and taxability. Therefore, it makes a difficult decision and require guidance keeping in mind the purpose. While Provident Fund and pension plans are very safe, but the money is locked up for long term. National Savings Certificate (NSC’s) and five-year fixed deposits are also secured and have a shorter lock-in period with lower returns. Equity Linked Savings Scheme (ELSS) funds give extraordinary returns but entail high risks. Traditional life insurance policies offer low returns commensurate with low flexibility and low risk. It is rightly said that “Too many choices can overwhelm us and cause us to not choose at all”. Analyzing each option from various perspective may help in navigating the investment decision. Refer table below
|Investment Scheme||Employee’s Contribution||Employer’s Contribution||Lock-in period||Taxability at the stage of withdrawal|
|ELSS||Deduction under section 80C within the cap of INR 150,000 per year||Not applicable||3 years||1) Long term gains subject to Securities Transaction Tax (‘STT’) – Exempt; 2) Long term gains not subject to STT – Taxable at 20% (plus applicable Surcharge and Education Cess)|
|Public Provident Fund||15 years||Exempt|
|Life Insurance Premium||Depends on the tenure of policy||Exempt subject to the provisions of section 10(10D)|
|NSC||NSC up to VIII Issue – 5 years. NSC IX Issue – 10 years||Interest is taxable|
|Tax saving fixed deposits||5 years||Interest is taxable|
|Recognised Provident Fund (RPF)||Exempt under section 10(12) up to contribution of 12% of salary||58 years / early withdrawal (subject to conditions specified)||Exempt under following circumstances:|
1) Completion of 5 years of continuous service;
|National Pension Scheme (NPS)||Deduction under section 80CCD(1B) up to INR 50,000 ; in addition to INR 150,000 under section 80C||Deduction up to 10% of the salary under section 80CCD(2)||60 years / partial withdrawal option available (subject to conditions specified)||At the time of withdrawal upon retirement:|
* 60% of accumulated balance can be withdrawn and 40% to be invested in purchase of annuity;
* 40% of accumulated balance is exempt and 20% is taxable.Withdrawal before retirement:
* 20% of accumulated balance can be withdrawn, which is fully exempt;
* 80% of accumulated balance to be invested in purchase of annuity.
|Approved Superannuation||Deduction under section 80C within the cap of INR 150,000 per year||Taxable as a perquisite if the same is in excess of INR 100,000 per year under section 17(2)(vii) Maximum contribution including Provident Fund cannot exceed 27% of salary as per Rule 87||Retirement: Exemption subject to the provisions of section 10(13) Resignation: Fully Taxable|
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As the Budget 2018 is around the corner, some of the schemes with similar characteristics might be brought at par in terms of tax benefit and lock-ins. Tax benefits had been the driver for investments in India. The following could be worth considering –
Delete the disparity of EET (exempt, exempt and tax) for NPS to make it more attractive (like RPF, PPF which is EEE) if the Govt. is intending to position NPS as the most sought after pension scheme over the RPF shown by allowing tax free transfer of corpus from RPF to NPS.
The investments in mutual funds or equity does not attract long term capital gain tax, so it would be unfair to tax NPS on maturity which may have 50% of equity. Imposing a minimum investment period of 3 years or 5 years to qualify for exemption may still be welcome.
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The compulsory annuity requirement of NPS takes away the flexibility and also affects the return on investment. Like we have special rate of tax for debt related long term capital gain, a special concessional rate for NPS is worth contemplating.
The young generation wants cash in hand therefore rigid withdrawal rules before 60 makes NPS unpopular amongst the new working class who views this as an embargo to access their own money.
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Superannuation on resignation is fully taxable while RPF post five years of accumulation is not taxable. A parity could be aimed brought to make Superannuation more attractive.
Reduce rate of GST on insurance products to make it affordable.
The FM may consider correcting some of the unfairness in terms taxation of NPS on withdrawal if compared with Equity/MF or RPF and also some flexibility in terms mandatory annuity investments etc. might go a long way in making this a true pensionable investment avenue for all.
Ravi Jain – Partner Personal Taxation, PwC India with inputs from Vikas Narang – Associate Director