Tag: NPS

Are NPS equity funds finally bringing cheer to investors?

Personal Finance

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The National Pension System (NPS) marks another anniversary since opening up for all citizens in May 2009. At this juncture, an assessment of the performance of different investment options under NPS shows that growth investing and high risk appetite seem to have paid off for investors over the long term. The market rally in the last year has played its part too, in pushing up returns in the equity (Scheme E) option under NPS in the short term. The performance of NPS funds over various time periods can be seen in the accompanying table.

Equity wins….

The average returns of Tier I Scheme E funds has outperformed government securities (Scheme G) and other fixed income instruments (Scheme C) over one-, five- and ten-year time frames. But Scheme E under-performed in the three-year period, where government securities (G-Secs) and other fixed income instruments still hold an edge. But NPS being a long-term investment with restricted withdrawal options, investors can depend on equity to deliver the goods, show the numbers.

Scheme E of NPS has also beaten the relevant mutual fund category (large-cap) funds by 90-430 basis points in 1-, 3- and 5-year periods. Even on a ten-year basis, they are almost at par with mutual funds, lagging the average large-cap MF returns by just 35 basis points. One basis point is one-hundredth of a percentage.

Under the ‘Active’ choice, investors can allocate up to 75 per cent in Scheme E up to the age of 50. Under the ‘Auto’ choice, Scheme E allocation ranges from 5 to 75 per cent based on your age and option chosen (conservative, moderate or aggressive).

….But not enough alpha

There are 7 pension funds (HDFC, ICICI, Kotak, LIC, SBI, UTI & Aditya Birla Sun Life) for the All Citizens Model.

After eating humble pie for some years, investors with a majority of their NPS exposure to equities now can smile. Scheme E invests predominantly in large-cap stocks and its average returns are now better than those of large-cap funds and the BSE 100 TRI. While the polarised market conditions until early 2020 and the sharp fall in February-March 2020 previously dented the performance of Scheme E funds, the rebound last year has taken everybody by surprise.

NPS equity funds may have done well in comparison to relevant mutual funds . But there is room for improvement in terms of alpha (i.e. excess return over benchmark BSE 100 TRI). Over the one-year period, only one among the seven Scheme E funds has beaten their equity benchmark. Over 3-, 5- and 10-year periods, alpha remains weak. One can, of course, argue that large-cap funds, even in MFs, have lagged benchmarks.

The poor alpha generation track-record of NPS equity funds is in contrast to Scheme G and Scheme C funds. Despite G-Secs and other fixed income instruments at this moment losing sheen to equity, they boast of better alpha. All the Scheme G funds have outshined their relevant benchmark across all periods. Scheme C funds have lagged their relevant benchmark in 1- and 3-year periods, but returns are at par in 5- and 10-year periods. Like NPS equity funds, Scheme G and Scheme C funds show comprehensive out-performance over average returns of equivalent mutual fund categories (gilt, medium to long and long duration mutual funds). Scheme G funds took advantage of the fall in long-term bond yields in 2014, 2016 and 2019 to clock good returns. Investing in G-Secs today may lead to lower returns in the short- to medium-term, but with NPS being a long-term investment, returns smoothen out. Also, Scheme G carries near zero default risk.

Scheme C carries slightly higher risk than Scheme G, though funds invest over 80 per cent in AAA-rated bonds. Scheme C funds have not been immune to the turmoil in the corporate bond market. However, over the long term, small losses from such events could be compensated to a good extent by capital appreciation.

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Save smart: Know these three different ways to invest in NPS

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The National Pension System (NPS) has been witnessing good growth in number of subscribers on account of market-linked return potential, freedom to choose between different asset classes and the additional tax-saving benefit of up to ₹50,000 on annual investments in Tier 1 NPS account.

With the financial year about to end, subscribers may be searching quick ways to invest in NPS. Apart from the usual routes that DIY investors can utilise for NPS investments, there is a facility called D-Remit (Direct Remittance) that can be a handy tool for investors looking to get same-day NAV (net asset value).

POP-SP

First, subscribers can deposit their subsequent contributions at any Point of Presence Service Provider (POP-SP) or Nodal Offices of the NPS, either in cash or by cheque. POP-SPs are banks or other firms that provide services under NPS through their network.

While the minimum amount stipulated per contribution is ₹500 and ₹250, for tier 1 and tier 2 accounts, respectively, there is no cap on the maximum amount of contribution (for both the accounts). However, those depositing contributions in excess of ₹50,000 using cash are required to submit KYC documents to the POP-SP.

Note that the minimum contributions mentioned above are for subsequent contributions only. For the initial contribution at the time of registration, one needs to contribute at least ₹500 and ₹1,000 in tier 1 and 2 accounts, respectively.

While the NPS units shall be allotted two days after the funds are credited to the trustee bank of NPS, the contributions made through nodal offices or POP-SP may take time to get credited to the trustee bank (delays can be due to deposit of cash collected and cheque clearance).

e-NPS

Secondly, contributions through eNPS (through the e-NPS website or using the mobile application) — made through net banking, debit card, credit card or UPI — are also credited to your NPS account on a T+2 basis.

Compared with deposit of cheques or cash, online payment methods cause fewer delays in fund clearance.

D-Remit

However, with the end of the financial year approaching fast, subscribers may prefer to make their contributions using a much faster mode. This is where the direct remittance facility launched by NPS in October 2020 is more useful. D-Remit is an electronic system through which money can be directly transferred from your bank account to the trustee bank so that you can get same-day NAV for your NPS investment.

Subscribers only need to have a virtual id with a trustee bank to use D-Remit, used only for the purpose of remitting NPS contributions. The id can be created on the CRA (Central Recordkeeping Agency) websites. NPS customers can go to either of these two links to create virtual ids: tinyurl.com/dremit1, tinyurl.com/dremit2.

After this, the subscriber needs to carry out virtual account registration using the Permanent Retirement Account Number (PRAN).

The creation of the account may take up to one working day. A confirmation on activation is sent via mail and SMS. In case, you are using the D-Remit facility for both the tiers, two separate virtual accounts are created. Subscribers won’t incur any additional costs for creating the ids.

Next, you will have to login to the net banking facility of your bank and add the virtual account generated as a beneficiary account, along with your name as per CRA records, as the beneficiary’s name. The IFSC code for the virtual id shall be UTIB0CCH274. After adding the beneficiary, funds can be remitted using RTGS/NEFT/IMPS modes.

Those who wish to get the-same day NAV will have to make the contributions before 9. 30 am (on a working day). The minimum contribution through D-Remit is ₹500 for both tier 1 and tier 2 accounts, while there is no cap on the maximum contribution.

Investors must note that akin to mutual funds, one can make lumpsum contributions or opt for Systematic Investment Plan (SIP) in NPS as well. You can also set a standing instruction through the same internet banking login for investing a specified amount at regular intervals in your NPS accounts, to the beneficiary added (virtual ids).

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Is EPF alone good enough for retirement kitty?

Personal Finance

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Maximum safety for the corpus, fixed returns and tax-free status at the time of investment (up to ₹1.5 lakh), on interest accumulated as well as on the maturity proceeds make EPF among the most efficient instruments for building long-term savings.

However, tweaking EPF norms in the Budget and outside of it has been the practice in the last few years. This year is no different, with the Budget proposing taxation of interest on employees’ contribution over ₹2.5 lakh to provident funds, made after April 1, 2021. While this move is targeted at high-income earners according to the government, the tweaking of EPF rules over the years holds a lesson for all classes of investors – don’t put all your eggs in one basket.

Target of changes

EPF has been the favourite tinkering target for many years now, bringing uncertainty to retirement planning based on EPF alone. Budget 2016 originally proposed that only 40 per cent of the EPF corpus will be tax-free (for corpus from contributions made beginning April 1, 2016), only to roll back the much-criticised move. A monetary limit of ₹1.5 lakh for employer contribution (for taking tax benefit) was also proposed and withdrawn.

In Budget 2020, employer contribution towards recognised provident fund, NPS and other superannuation funds was prescribed an upper limit of ₹7.5 lakh, beyond which it would be taxed as perquisite in the hands of the employee. Accretions to this, such as interest or dividend to the extent of the employer’s contribution included for tax purposes, is also taxed.

The Employee Pension Scheme (8.33 per cent of the employers’ matching 12 per cent contribution goes here ) was withdrawn for new employees who joined the workforce after September 1, 2014 and whose basic pay plus dearness allowance (DA) exceeded ₹15,000 per month. Also, pensionable salary was subject to a cap of ₹15,000 for those joining after September 2014. Prior to that, higher contribution was allowed at the option of the employer and employee. (matters remain sub-judice, though).

VPF attraction dims

A back of the envelope calculation shows that an income (basic pay and dearness allowance (DA)) of about ₹20 lakh a year, at 12 per cent, will fetch an EPF contribution of about ₹2.5 lakh. Thus, the government’s defence to taxing interest on EPF contribution over ₹ 2.5 lakh is that it is targeted at the high-income group. But directionally, this move discourages Voluntary Provident Fund (VPF) contributions as even those earning below ₹20 lakh could be using the VPF route to invest further in the EPF. Up to 100 per cent of the basic pay and DA can be contributed to the VPF in a year by an employee, over and above the 12 per cent contribution to EPF. Earning the same interest rate as the EPF, the VPF provides a risk-free, tax-free route to further build your retirement corpus if you are an EPF subscriber. The attractiveness of the VPF now dims for these investors.

Return uncertainty creeps in

Not only that, the ability of the EPFO to give returns unconnected with the market situation is being put to test lately. In what was perhaps the first time, the EPFO last year declared that it would pay the promised interest of 8.5 per cent for FY20 in two instalments, split as 8.15 per cent from debt investments and 0.35 per cent from the equity portion.

Until sometime ago, the EPF contributions were invested entirely in debt instruments. The EPFO began investing in the stock market in 2015. About 15 per cent of the incremental flows is in now invested in the stock market through the ETF (exchange-traded fund) route. When the EPFO declared an interest rate of 8.5 per cent for 2019-20 earlier , the idea was that it could offload its ETF holdings to the necessary extent to fund this interest outgo. But the market sell-off due to the Covid-19 outbreak at the fag end of the financial year spoilt the plan. Thus, stock market investments have now brought an amount of uncertainty to returns and this factor is here stay.

Also, the EPFO’s practice of higher interest payouts on the debt portion when compared to the prevailing market interest rates — which has quite been the norm so far – may not carry on forever, as interest, declared from the surplus available may not mirror the returns made by its underlying portfolio. The stock market exposure accentuates this divide.

Pat for NPS

While EPS has been losing sheen in many ways, the National Pension System (NPS), which is a market-linked retirement product, has been in the spotlight. As early as Budget 2015, the then Finance Minister spoke of bringing out a mechanism to help employees migrate from EPF to the corporate NPS scheme, clearly bringing out the government’s preference to shift the burden from their shoulders. This was followed by providing an additional deduction of ₹ 50,000 from taxable income for NPS investments, over and above the ₹1.5-lakh 80C deduction limit in the same budget.

Budget 2016 declared the 40 per cent of the NPS corpus that is compulsorily invested in annuities, tax-free (annuity income taxable). Budget 2019 declared the remaining 60 per cent that can be withdrawn in lump sum, also tax-free. Returns earned on NPS contributions are tax exempt as well (except on employer contribution in case of corporate NPS over a certain limit). These factors should serve as a wake up call for investors who until now could take low risk and earn high returns. The time to sweat it out has arrived.

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Tata Asset Management, DSP Investment Managers and Axis Asset Management apply for licences

Banking & Finance

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Pension regulator PFRDA has received 10 applications including three from new ones for the Request for Proposal (RFP) it had floated for selection of sponsors of pension funds for National Pension System (NPS).

While seven of these are from existing pension fund managers, the three new ones are Tata Asset Management Company, DSP Investment Managers (India) Pvt Ltd and Axis Asset Management, sources close to the development said.

The seven pension fund managers who already manage NPS funds are the pension arms of SBI, UTI, LIC, ICICI, HDFC, Aditya Birla Sun Life and Kotak.

PFRDA issues RFP for selection of pension fund sponsors

It maybe recalled that PFRDA had in December 2020 come out with a new RFP for selection of sponsors of pension funds for NPS, throwing open the door for more pension fund managers with at least five-fold jump in their fees, making it lucrative.

The Pension Fund Regulatory and Development Authority (PFRDA) had taken this big initiative to revamp the pension funds management structure in India and position the industry for strong decadal growth that could take the overall assets under management of NPS to ₹30-lakh crore by 2030.

The main objective behind the RFP is to expand the number of players (only serious) in the pension industry and ensure that existing as well as new players are better remunerated in terms of fund management fees in line with the size of their operations.

This latest RFP had several firsts to its credit. This is the first time PFRDA had come out with a combined RFP — both for the government and private sector. For the government, the last RFP was in 2012 and in 2013-14 for the private sector. They had different structures and restrictions.

Slab structure

The Government was open for certain state-controlled pension fund managers and the private sector was open for all. In April 2019, the government had allowed even private pension fund managers to manage NPS funds of government schemes. Now, there is no distinction between government, PSU or private pension fund managers.

Strong show: Pension assets surge 35.65% as of November 2020

This is also the first RFP where PFRDA had specified a slab structure for investment management fee. In the earlier regime, it was a flat fee. PFRDA has now gone in for a graded slab structure (four slabs from 3 paise to 9 paise) so that the new entrants to this field will not find it difficult to build a corpus. This will help them achieve scale while meeting their early establishment expenses. From a previous regime fee level of 1 paisa for every ₹100 of pension funds managed, PFRDA has now proposed an average fee of 5 paisa per ₹100 of pension monies managed. This is a five-time increase. This effective fee of about 5 paise is the cheapest in the pension world and PFRDA pricing is the most competitive.

With increase in fee structure, it is expected that pension fund managers will make profit while having funds for building infrastructure and support team.

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What you should know about EPFO pension

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The Employee Pension Scheme (EPS) hogged headlines recently. Reports suggested that the Centre wants the EPS to be moved from a defined benefit scheme to be a defined contribution scheme.

If this proposal sees the light of day, it may change the amount of pension you will receive from the government under the EPS scheme. Being a defined benefit plan, EPS provides a specified pension amount to the member based on employees’ salary, number of years of service and the age of retirement.

But in a defined contribution plan, basis which the National Pension Scheme operates, the pension amount depends on the amount of contribution.

NPS is a voluntary contribution pension scheme while EPS is mandatory for eligible members. Here, we look at some of the important aspects of the current Employees’ Pension Scheme.

Eligibility

All employees in India who are enrolled with the Employees Provident Fund Organisation (EPFO) automatically become members of EPS as well.

But in a major amendment to the EPS in September 2014, the eligibility to the scheme was limited only to those EPFO members whose basic pay plus DA (dearness allowance) is up to ₹15,000 per month. Thus, if you have joined the workforce on or after September 1, 2014, you are likely be part of only the provident fund scheme and not the pension scheme.

Contribution

When you become a member of EPFO, your monthly salary is credited only after the deduction of 12 per cent of your basic plus DA towards the provident fund. The employer also makes a matching contribution of 12 per cent from their pocket towards your retirement corpus.

Out of the employer’s contribution of 12 per cent, 8.33 per cent goes into the EPS fund and only the balance 3.67 per cent goes towards provident fund accumulation. The central Government also contributes 1.16 per cent of the pay (basic+DA) of the employee towards the EPS.

However, there is a cap on EPS contribution. Where the pay of the member exceeds ₹15,000 per month, the maximum pay on which the contribution is payable by the employer and the Centre is limited to ₹15,000 per month (₹6,500 until September 1, 2014). Thus, here,maximum employer contribution to the EPS account on behalf of a member per month will not exceed ₹1,250 per month (8.33 per cent of ₹15,000).

Higher contribution beyond the ceiling (₹6,500/₹15,000) was also allowed at the option of employer and employee, subject to conditions, but only for existing members as on September 1, 2014.

Pension payout

A member will be entitled to monthly pension payout until death if she has rendered eligible service of 10 years or more and retires on attaining the age of 58 years.

The monthly pension amount will be calculated based on salary and the number of years of service using the formula (pensionable salary*pensionable service/70).

The pensionable salary will be the average monthly pay drawn during the span of 60 months preceding the date of exit from the membership of the Pension Fund (this was at 12 months before the September 2014 amendment). The pensionable salary is, however, subject to a ₹15,000 per month cap. For example, if the average pay drawn during the last sixty months before exit is ₹50,000 and was in service for about 30 years, the monthly pension amount works out to about ₹6,429 (₹15,000*30/70).

In case of existing members as on September 1, 2014, who had been contributing on salary exceeding the wage ceiling (₹ 6,500/15,000), pensionable salary will be based on such higher salary. A member is also allowed to draw an early pension from a date earlier than 58 years of age but not earlier than 50 years of age. In such cases, reduced amount of pension will be paid.

Note that, irrespective of whether an employee has serviced for eligible number of years or not, the member will be eligible for some pension benefit in case of permanent and total disablement during the service.

In case of death of the member, where at least one month’s contribution has been paid into the Employees’ Pension Fund, the family (including widow and children) will obtain the pension benefits, subject to conditions.

Matter sub judice

Clearly, the 2014 amendments to EPS Scheme lowers the number of people that can be eligible for EPS benefits (due to wage limit of ₹15,000) as well as the amount of monthly pension (as, now the pensionable salary of average of last 60 months as against 12 months earlier).

The Kerala High Court, in 2018, set aside the amendments with respect to EPS in 2014. The EPFO filed a special leave petition against this in the Supreme Court, which was dismissed by the apex court in 2019. A review petition against this order of the Supreme Court has been filed by the EPFO and SC’s judgement on the same is awaited.

Meanwhile, many corporate firms seem to be following the EPS scheme as amended in September, 2014 for now.

Further, issues related to benefit of higher pension based on contributions on actual salary for employees of exempted establishments, too, awaits judgement from the SC.

EPFO, in May 2017, created two classes – exempted and non-exempt establishment and denied higher pension based on contributions on actual salary to employees of latter.

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What tax deductions are allowed on pension income

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I would like to know whether a senior citizen is eligible for the following I-T deductions from his/her pension income: i) deduction under Section 80C – ₹ 1.50 lakh ii) deduction of FD interest– ₹ 50,000 iii) deduction of NPS contribution– ₹ 50,000; total deduction– ₹ 2.50 lakh. A senior citizen having a pension of ₹7.5 lakh per annum will not be required to pay any income tax after deduction of ₹.2.5 lakh mentioned above. Can you please clarify whether the above understanding is correct or not?

Subramanian

As per the provisions of Section 80A under Chapter VIA of the Income-tax Act, while computing total income, an assessee is eligible to claim deductions under Section 80C to 80U of the Act (subject to the conditions and eligibility of the respective sections). Accordingly, you shall be eligible to claim eligible deductions under Sections 80C, 80TTB (against interest earned on deposits, up to maximum of ₹50,000) and 80CCD(1B) for NPS contribution (up to maximum of ₹ 50,000).

Further, for FY2020-21, though the minimum amount not chargeable to tax is ₹2.5 lakh, a resident individual is eligible to claim rebate under Section 87A of the I-T Act if his/her total income (after deductions) does not exceed ₹ 5 lakh. Hence, a resident individual having total income after eligible deductions up to ₹5 lakh need not pay any tax.

However, in your case, the income earned is pension income of ₹7.5 lakh. Total deductions of ₹2.5 lakh as mentioned in your query, includes a deduction of ₹50,000 which is available only on interest on deposits (Section 80TTB) and not against pension income. Hence, deduction under 80C and 80CCD(1B) shall only be eligible against the pension income subject to the fact that you have made eligible contributions / payments for various schemes for such a claim.

However, on the presumption that your pension income is received pursuant to your employment (and is not a family pension/from a pension investment plan), the same shall be taxable as ‘Salary’ income and you shall be eligible for a standard deduction of ₹ 50,000 against such pension income.

I have applied for home improvement loan from Indian Bank for painting, damp prevention masonry work, etc. I was told that I can claim deduction under Section 24 and others of the Income tax Act for interest up to ₹1.5 lakh for self-occupied property. Please advise on the amount of deduction allowed for renovation of self-occupied property of senior citizens under current tax laws

Sushovan Sen

I understand that you own and occupy the house property. As per Section 24(b) where a self-occupied property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the taxpayer may claim a deduction of the interest payable on such borrowed capital/loan of up to ₹30,000.

Considering the painting, damp prevention, masonry work type as repairs, renewal, you shall be eligible to claim deduction of up to ₹30,000 on account of interest payment on such loan.

Please note that for loans taken on or after April 1, 1999 for acquisition or construction of a property and where such acquisition or construction is completed within five years from the end of the financial year in which loan is taken, total amount of ₹2 lakh is allowed as deduction.

Since this is a self-occupied property, any deduction claimed would result into loss under the ‘House Property’, which shall be eligible to be set-off against any head of income in the same year. Any excess, shall be allowed to be carried forward and set off only against house property incomes for next 8 assessment years following the AY in which the loss had occurred.

The writer is a practising chartered accountant.

Send your queries to taxtalk@thehindu.co.in

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Financial planning: Striking a work-life balance

Personal Finance

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Sundar, aged 39, under stress due to his employment, was desperate to quit. His wife, Nandini, aged 37, was not earning.

. Sundar wanted to set aside an emergency fund for medical needs. He also wanted to gradually liquidate a few investments to support his expenses till he got employed in a relatively less-stress job. He also was inclined to venture on his own as an alternative.

Sundar wanted to protect his commitment towards the education of his son, aged 11. . His net worth and annual cash flows are mentioned in the accompanying tables.

Goals

After a detailed discussion, the goals were redefined as follows. An emergency fund of ₹16 lakh was to be maintained. The housing loan was to be foreclosed in the next 5- 7 years. Sundar also wanted to accumulate ₹ 30 lakh at current cost for his son’s education that would fall due in 2026; at 10 per cent inflation, the cost worked out to about ₹ 53 lakh.

Sundar wanted to retire at his age of 50. The life expectancy for him and his spouse was up to age 90. The retirement expenses were found to be ₹40,000 a month. Considering 6 per cent inflation over the years, it amounted to about ₹76,000 a month at age 50; this warranted a corpus of ₹ 2.91 crore at retirement.

As Sundar wanted to settle in his home town, we suggested that he dispose both the houses in Bengaluru. With the proceeds, he could buy a farmland and a house in his home town for a comfortable retired life.

In addition to the retirement corpus, Sundar wanted to build a wealth corpus of ₹2 crore to provide for his travel, health and other needs post retirement.

We assessed Sundar’s risk profile as ‘growth- oriented’. His current asset allocation was almost equally split between equity and debt including his RSU (restricted stock units) holdings.

He was saving regularly in a ratio of 60:40 in equity and debt. We recommended the same allocation ratio for his future savings and investments.

Recommendations

We advised Sundar to tag ₹16 lakh of his fixed deposits as his emergency fund. Another ₹ 2 lakh can be tagged as a fund towards career growth. We recommended that Sundar invest ₹8 lakh and tag his current mutual fund holdings of ₹7 lakh to his son’s education. This would fetch him a corpus of about ₹ 26.5 lakh in six years. He was advised to invest ₹ 30,000 per month to manage the deficit — staying with large cap funds for the equity allocation and short -term funds for the debt allocation. Sundar could expect to generate a corpus of ₹ 2.2 crore from his current holdings of EPF (Employees’ Provident Fund), PPF (Public Provident Fund) and RSU and his regular contribution to PF and PPF. To fund the deficit in the retirement corpus, we advised him to invest ₹ 31,000 per month in 70:30 allocation in equity (using a combination of large- and mid-cap funds) and debt (through National Pension System).

Sundar had been investing ₹50,000 per month in his RSU through his voluntary savings and RSU allotments every year. As he did not plan to continue with the current employer, we recommended not to tag such savings. We advised him to increase his loan repayment by ₹ 25,000 per month. This will help him close his housing loan in 5.5 years, and save interest cost of about ₹ 10 lakh as well.

Sundar would have to invest about ₹10 lakh per annum to get another ₹ 2 crore as wealth corpus at his retirement. He was not in a position to commit this amount now. But with his earning potential, he would be able to invest later. The loan repayment and his son’s school fees will stop after six years. This should also help him accumulate the desired corpus.

We also advised Sundar to opt for ₹1.5 crore pure term life insurance for himself and ₹10 lakh health insurance for his family immediately.

Sundar’s disciplined savings and investments over the years made it possible to achieve his desired work-life balance.

The writer is an investment advisor registered with SEBI and Co-founder of Chamomile Investment Consultants, Chennai

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