Tag: pension

Tax query: Does inheritance attract income tax?

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My wife has received some money being the second holder in an FD with her mother (now deceased). The FD maturity amount is to be shared with all her brothers and sisters, as per the legal heir certificate (there is no will). As of now, the bank has deleted the name of the first holder on submitting the death certificate. How does she account for these amounts? Already a portion was shared but the entire TDS isn’t being shown in her name.

HH BernardAs per the provisions of Section 56(2)(x) of the Income-tax Act, 1961 (‘the Act’), a sum of money received by way of inheritance should not be considered as taxable in the hands of the recipient. Thus, money received by your wife as legal heir of her mother shall not be taxable in her hands. Her share of such receipt will be required to be considered by her as an exempt income and accordingly reported while filing her tax return for the subject year. Regarding claim of TDS, your wife will be required to claim credit of her share of proportionate TDS in her hands along with proportionate share of interest income, and the balance TDS (for siblings’ share) will be required to be passed on to respective siblings. Such bifurcation must be appropriately reported in your wife’s income-tax return form (under TDS schedule) for the financial year in which tax has been deducted.

My father-in-law (78 years) is a retired government official earning a monthly pension from Central Government. Is he eligible to invest under PMVVYor SCSS? What are the tax benefits/liabilities, if any, subject to his eligibility?

Ashim Sanyal

The primary eligibility criteria for both the schemes mentioned by you i.e. Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS), is that the individual opening the account should be 60 years of age or more. The schemes do not have any restriction on the maximum entry age or for retired central government employees. NRIs/ HUFs are not eligible for SCSS. As your father-in-law is 78 years of age and assuming he is a resident in India (pre-requisite for SCSS), he shall be eligible to invest in both the scheme.

Both schemes do not provide any tax benefits at the time of making investments. The pension received from the scheme shall also be taxable in the recipient’s hand at applicable slab rates, as ‘Income from Other Sources’.

I have invested around ₹4 lakh in some mutual fund schemes, all being regular plans with dividend options. They have deducted tax on the dividend amounts paid during financial year 2020-2021. Will the mutual funds issue Form 16A and will the details of taxes deducted and remitted to the Government be reflected in Form 26AS of the tax department? Also, can I claim refund of the tax so deducted on filing my return of income? Please clarify.

J R Ravindranath

As per section 194K of the Income-tax Act, 1961, any person, making payment of dividend from mutual funds, shall at the time of credit of such income or at the time of making payment (exceeding ₹5,000), whichever is earlier, shall deduct tax at source (TDS) at 10 per cent. The deductor is required to file the details of such TDS in quarterly withholding tax statement (Form 26Q) and TDS certificate (in Form 16A) is required to be issued by the deductor within prescribed timelines. Details of such income and corresponding TDS shall reflect in your Form 26AS for FY 2020-21. You can file an income tax return and show your dividend income as also any other income which needs to be declared. Basis your taxable income and resultant tax payable, you can claim credit for TDS on dividend and claim a refund, if any.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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Is PMVVY better than other senior citizen schemes

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The relentless fall in India’s interest rates over the last six years has been hard on retirees and regular income seekers. For seniors, exploring special government schemes before bank deposits or debt mutual funds makes a lot of sense, as they offer superior returns with high safety. We take stock of the modified Pradhan Mantri Vaya Vandana Yojana (PMVVY) and stack it up against competing avenues.

Features

PMVVY is a guaranteed pension scheme offered exclusively by the LIC. Open only to individuals who have completed 60 years, it promises regular pension payments at a monthly, quarterly, half yearly or yearly frequency in return for an upfront investment (called a purchase price).

This scheme which was set to expire in March 2020, was modified and extended upto 31 March, 2023. The scheme’s return has been aligned to that on the post office Senior Citizen’s Savings scheme, with a cap of 7.75 per cent. For FY21, the return is 7.4 per cent. It will be revised in FY22 and FY23 if SCSS rates change. If you invest before March 31, 2021, your return will be 7.4 per cent for the entire 10 years.

While this is due for reset on April 1, it appears unlikely that it will be hiked, given the premium over market interest rates.

PMVVY sets minimum and maximum limits on your investment at ₹1.56 lakh and ₹15 lakh respectively. If you’ve invested in the earlier version of PMVVY, you won’t be allowed to invest more than ₹15 lakh in both versions put together. The scheme guarantees pension payouts for 10 years, with a return of principal at maturity. Should the investor die within 10 years, beneficiaries will get back principal. Premature exit with a 2 per cent penalty on principal is allowed in case of critical or terminal illness of self or spouse. Investors can avail of loans (up to 75 per cent of the investment). The scheme enjoys no tax benefits, except for GST exemption on principal.

How it compares

To Immediate annuity plans: LIC and other insurers offer immediate annuity plans- where you can get a lifelong pension against a lump sum upfront investment. The PMVVY offers better pension rates than them. A 60-year old buying LIC’s Jeevan Akshay VII, for instance, will receive an annual pension of ₹71,210 under the return of purchase price option versus ₹76,600 under PMVVY. Under Jeevan Shanti, where he needs to defer his pension by a year, he would receive ₹54,900.

For those seeking liquidity, the PMVVY’s 10-year lock-in may seem more palatable than the lifelong lock-ins of other immediate annuity plans. PMVVY waives GST while immediate annuity plans levy it at 1.8 per cent of the purchase price.

The PMVVY however does suffer from some negatives. The ₹15 lakh cap on total investments restricts your monthly pension to ₹9,250. PMVVY offers the same pension rate for all subscribers above 60. In other immediate annuity plans, pension rates rise substantially with age. Under Jeevan Akshay VII, a 70-year-old can take home 30 per cent more pension than a 60-year old with an identical purchase price.

To Senior Citizens Savings Scheme: The SCSS from India Post allows seniors above 60 to deposit upto ₹15 lakh with a guaranteed quarterly payout at 7.4 per cent per annum. Those above 55 who have taken VRS or have retired can park retirement proceeds in the scheme. Interest rates on SCSS are reset quarterly by the Government. The scheme carries a 5 year lock-in, with initial investments eligible for section 80C benefits. The interest is taxable. The scheme allows premature withdrawal but with a penalty.

When you are investing close to the bottom of a rate cycle like now, SCSS with a 5-year lock-in can help you secure better rates more quickly than PMVVY.

PMVVY is also constrained by the cap of 7.75 per cent on rates. SCSS’ facility to withdraw without any conditions attached is a big plus for seniors looking to take out money for emergency needs or to switch to better rates after one year.

The 80C benefit can help seniors meet their tax saving goals along with securing regular income.

SCSS does not offer a monthly pension option and does not facilitate loans. However, incomes from both SCSS and PMVVY are liable to tax at your slab rate.

To bank deposits: One-to-five year deposits with leading banks today offer rates of 5-5.5 per cent. Small finance banks offer 7-7.5 per cent. But PMVVY is safer than small finance banks as it is LIC and government-backed. You can also get predictable pension payouts for 10 years without worrying about rate moves.

In a rising rate scenario, parking in upto 1 year bank deposits can help you benefit quickly from higher rates.

But given the gap between the present PMVVY rate of 7.4 per cent and deposit rates of leading banks, it may be some time before deposit rates catch up.

Therefore decide between PMVVY and bank deposits based on the 10 year lock-in.

(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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Nabard retired staff hold protests across country

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Even after 40 years after its inception, the employees of the National Agricultural Bank for Rural Development (Nabard) complain of a pension anomaly that puts them in a disadvantageous position when compared to their peers in the Reserve Bank of India.

They compare their salaries, benefits and pension with that of the peers in the RBI because a large portion of its employees (3,000) were hired from the apex bank when the Nabard was conceived in 1981.

The pensions are not being revised on the implementation of new pay scale for the regular employees, keeping the pension slabs very low.

The staff argue that increasing pensions would not cause any additional burden to the exchequer as the Nabard had a pension corpus of about ₹4,500 crore.

“While encouraging some of us to join the Nabard, we were given the assurance that we will be given salaries, perks and superannuation benefits on par with the RBI staff. But our hopes are dashed as we are saddled with a lower pension slab,” P Mohanaiah, who worked as a General Manager of Nabard (Andhra Pradesh), told BusinessLine.

On Monday, hundreds of serving and retired employees of the Nabard organised dharnas in different parts of the country, demanding revision of their pension on par with their peers in the RBI.

The Nabard was carved out of the RBI by an Act of Parliament, by replacing three of its departments – Agricultural Credit Department (ACD), Rural Planning and Credit Department (RPCD) and Agricultural Refinance and Development Department (ARDC) – to give a focussed approach to promote agriculture and rural development.

The protesting employees claimed that there was a huge disparity between the retired employees of Nabard and that of the RBI.

“The promises have not been kept and the provisions in Nabard Act have not been respected,” Mohanaiah said.

The Lucknow bench of Allahabad High Court had directed the Union Government in November 2019 to take a decision in four months.

“The government is yet to take a call. We are contemplating to move a contempt petition,” a senior functionary of the United Forum of Officers, Employees and Retirees of Nabard, said.

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Is EPF alone good enough for retirement kitty?

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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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New fee structure opens the doors wider for pension fund managers: PFRDA chief

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Pension regulator PFRDA has now taken a 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 the National Pension System (NPS) to ₹30-lakh crore by 2030.

The regulator has now come out with a new Request for Proposal (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 for serious players to take a deep dive into this industry.

BusinessLine spoke to PFRDA Chairman Supratim Bandyopadhyay to get into the nuts and bolts of this reform process. Excerpts:

What is the objective of bringing the RFP?

It 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.

How is the latest RFP different from the earlier one?

This latest RFP has several firsts to its credit. This is the first time we have 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.

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.

Which are the other firsts?

This is the first RFP where we have specified a slab structure for investment management fee. In the earlier regime, it was a flat fee. We have 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, we are now proposing 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 our pricing is the most competitive.

With increase in fee structure, we expect pension fund managers to profit while having funds for building infrastructure and support team. We have found a balance that will not be too heavy on the wallets of subscribers and, at the same time, support the pension fund managers too. When the fee was 1 paisa, new sponsors were not very keen to enter this space.

Any other significant change this time round?

Earlier, we had a control on the number of fund managers and specified it as 10. This time, any number of fund managers can come as long as they fulfil our criteria. Anybody with five years experience of fund management on debt and equity and monthly average AUM of ₹50,000 crore for the last 12 months can apply.

We see strong interest already and, by January 22 (last date for submitting applicants); expect at least 15-16 serious applicants. The other significant decision we have taken is that licenses will be granted for perpetuity. Last time, we had allowed licence term of only five years or until a new RFP is issued. The new licence will have to be renewed every year. We have also this time round not stipulated that other bidders should match the fee proposed by the bidder with the least quote. There is no such compulsion this time.

Where do you see pension assets growing this fiscal and in the next decade?

We are on course to achieve assets under management of close to ₹6-lakh crore by end March this fiscal. This is going by the growth seen in the first nine months this fiscal. We had started the fiscal with AUM of ₹4.17-lakh crore and already touched ₹5.5-lakh crore by end December 2020. We have been growing at 35 oer cent CAGR and by this trend achieve AUM of ₹30-lakh crore by 2030.

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Right corpus eases retirement pangs

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Varadhan, an NRI aged 55 and retiring in 2021, has been working in West Asia for the last 30 years. He wanted to return to India and live comfortably in his home state of Kerala. Prior to retirement, he wanted to find out how much he could spend – rather, the threshold that would ensure a balanced life after retirement. Varadhan’s family includes his mother aged 85 and wife Shyama aged 51.

His assets were as follows:

Requirements

He wanted to set aside ₹12 lakh as emergency fund towards one year expenses with high liquidity and safety. Next, he desired to create a retirement portfolio with minimal risk to get an income of ₹75,000 per month (current cost) from his age 56 till age 90.

Varadhan wanted to set aside funds for his travel needs at an estimated cost of ₹3 lakh a year for 10 years. He also wanted to maintain health corpus of ₹1 crore for all three family members. Besides, he desired to buy a car costing ₹15 lakh. Finally, he wanted to create a will with his wife and daughter as beneficiaries with equal rights (for which we advised him to seek guidance from an advocate).

 

Priority to safety

Based on our discussion, we could understand that Varadhan had limited knowledge of financial instruments, and he had a conservative risk profile and investing mindset. He was a prudent saver and had built his financial assets over a relatively longer period backed by sheer discipline. He was not sure of inflation and its impact on savings over a long period. . Like many aspiring retirees, he also had the need to make a balance between risk and safety a paramount factor. Prima facie, Varadhan wanted to find out whether he could retire immediately or he would have to work till age 60 to add to this corpus and avoid unnecessary risk with his investments.

A challenge in this case would be taxation post retirement. Varadhan had accumulated much of his assets through NRE deposits and the interest was not taxable till date. But post retirement, when he becomes a resident in India, his interest income will be taxable. We helped him understand the taxation associated with deposits and safe investment products.

Recommendations

Based on the above, our set of recommendations were as follows. We advised Varadhan to reserve his NRO fixed deposit towards his emergency fund and car purchase. Hence, he needed to reduce his budget for the car or reduce the emergency fund. Next, we recommended that he create a retirement portfolio using his NRE deposits and mutual funds fully, along with 60 per cent of his gold savings. This will help him get retirement income of ₹75,000 per month from his age 56 till his wife’s life expectancy of 90.

Varadhan needed a corpus of ₹2.8 crore. We advised him to use products such as RBI Taxable bond, RBI Sovereign Gold Bond, large-cap mutual funds and high-quality debt mutual funds. Once he turned 60, he could choose Senior Citizens Savings Scheme and other investment products suitable for regular income. With a corpus of ₹2.8 crore, he needed to generate post-tax return of 6.5 per cent per annum to get the required retirement income. His expected inflation would be 5 per cent in the long run. He may come across periods where inflation could be higher; Varadhan could then use reserve funds to maintain his lifestyle.

His travel requirements (₹30 lakh) could be met with the balance investment in gold. This could be moved to safe avenues periodically to manage the volatility in gold prices. We advised Varadhan to take health insurance for a sum insured of ₹10 lakh each for himself and spouse. Also, the remaining ₹10 lakh from his gold investment could be reserved as part of the health fund immediately.

We recommended that Varadhan sell his land in the next 2-3 years and convert it to financial assets. This will help him manage his health corpus and reserve fund needs. To protect his retirement income from changes in economic assumptions, it is desirable to have ₹80 lakh as reserve fund. This is arrived on the basis of same inflation rate and expected return post-retirement.

Varadhan could retain his rental property and we suggested that rental income, if any, be gifted to his daughter every year. The rental income and maintenance charges for the house were not included in the cash flow calculations.

Every retiree we meet has a fear of outliving the retirement corpus. Safety of capital and inflation adjusted returns form a strange combination. Arriving at the right corpus, which we sometimes call ‘a rubber band corpus for retirement’ is crucial to meeting such expectations. Like how a rubber band has limited elasticity, the corpus should stand the test of inflation and the test of safety of capital. If this is taken care of while working, the desired result could be achieved.

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

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