Insights

The Budget and your investments

February 29, 2016 . Bhavana Acharya
With the roll-back of taxation on EPF by the Government, the sections of this post with regard to the EPF and its comparison with the NPS do not hold true.

One thing most look out for in Budget announcements is an increase in tax slabs, or an increase in deductions, or then, if wishes were horses, a cut in tax rates. None of these materialised this time. Instead, there are several other measures introduced, which will change investment decisions quite a bit. Here’s how the Budget will affect your investments.

Changes to provident funds
First, the National Pension Scheme will see some relief – the 40 per cent of the corpus that can be withdrawn at the time of retirement will now be exempt from tax. Earlier, all withdrawals were subject to tax. The remaining amount is compulsorily converted into annuities (plans run by insurance companies that give out monthly pension payments). The regular annuity payments, however, will be termed as income and taxed.

Second, the Employee Provident Fund will get similar treatment. 40 per cent of the accumulated balance will be exempt from tax, on contributions made after April 1, 2016. The remaining 60 per cent will be taxed if withdrawn fully. If this amount is instead used to invest in annuities, it will not be taxed. Annuity payments, as with the NPS, will be taxed.

So what are the implications of this? Contributions thus far in EPF remain tax-exempt and on this amount, you can breathe easy. But from here on, contributions to the EPF, especially those who contribute over the mandated amount (known as VPF or voluntary provident fund) will not be the best move. EPF and VPF will not be useful in building your retirement corpus. Apart from the inherent low returns, taxes will create a further dent. The government is looking into taxing only the interest accrued and not the total corpus accumulated; the decision on this is awaited. Even so, returns on this product will be lower.

With the tax treatment for EPF and the NPS now on par, the decision boils down to returns and on this front, the NPS scores due to its allocation to equity as well as deft juggling of the debt portion. The additional Rs 50,000 under Section 80 CCD adds to the NPS’ attractiveness.

Public provident fund will see no change at all in tax treatment and remains exempt at all stages.

Still, the direction the Government is taking is in bringing parity among debt products, making investors move to pension-based products, and get them used to market-linked returns. Change in tax treatment of PPF cannot be completely ruled out. All this strengthens the case for investing in Equity Linked Savings Schemes. It remains an EEE investment and with its superior returns over the long term, is by far the best tax-saving instrument there is.

A one-time shift from provident or superannuation fund into the NPS will be allowed, without attracting any tax whatsoever. These rules will come into force from the assessment year 2017-18.

Changes to gold schemes
With the Government trying to move investors’ appetite for gold away from physical gold, it had launched a Sovereign Gold Bond Scheme and a Gold Monetisation Scheme. These schemes have now got a tax boost. Now, both schemes pay interest. In the Gold Monetisation Scheme, this interest will now stand exempt from tax. The capital gains made on this scheme will also not suffer capital gains tax.

On the Sovereign Gold Bond Scheme, the interest earned will continue to be taxed. But on redemption, you will not have to pay capital gains tax any longer. If you transfer the bonds (since they are traded), you will be able to claim indexation benefits on long term capital gains.

As a result of these moves, physical gold is completely sidelined as an investment choice. The preferential treatment on interest and capital gains also renders them better than gold funds or gold exchange traded schemes, which have both short-term and long-term capital gains taxes applicable.

These rules, again, come into force from the assessment year 2017-18 – that is, the exemptions will be available on gains made in 2016-17.

Dividend tax for the rich
In a move to tax the rich more, in keeping with the observations made in the Economic Survey, dividend incomes greater than Rs 10 lakh in a year for an individual will be taxed at 10 per cent. This dividend is restricted to stock dividends and not those declared by mutual funds. There isn’t much you can do about this, really.

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