Revised DTC proposal may boost National Pension Scheme’s popularity

   The revised proposal in the Direct Taxes Code  (DTC) to scrap taxes on withdrawals from the New Pension Scheme (NPS) may boost  its popularity, but investment advisors will wait for the final norms to consider recommending this product to clients. The main reason for this scepticism is
that, going by the current proposals, the product will be taxed like a debt  mutual fund scheme, as NPS investment in equities is capped at 50% of the  corpus.

   Only mutual fund schemes with at least 65% of  their corpus in stock market enjoy the tax advantages of equity products. There  is no long-term capital gains (investments beyond a year) tax for equity funds,  while for debt funds it is 10%. For withdrawals before a year, a short-term  capital gains tax of 15% is applicable on equity schemes, while it is 30% for  debt schemes. “We need to look at the final draft to take a  decision on investing in NPS because of the grey area involving the 50% limit on  investments in equities,” said Gaurav Mashruwala, a Mumbai-based investment  advisor. 

   “The proposal to remove taxation on withdrawals from NPS has just taken  care of only one part of the concern,” he said. The government on Monday proposed the EEE  (exempt-exempt-exempt) method of taxation as against the EET (exempt-exempt-tax)  system recommended earlier. This means the product will be tax exempt at all  the stages of its tenure. The move is aimed at pushing NPS as the most preferred  route for retirement planning, as India lacks social security systems.

Investment advisors said the product has the  potential to compete with the equity balanced schemes or monthly income plans of  mutual funds, if NPS’ investment cap in equities is relaxed to at least 65%.

   “The best part about NPS would be that the  investment manager would be able to invest money into shares for the long run,  unlike open-ended schemes of mutual funds, which are forced to churn frequently  and hold 10-20% cash,” said Sunil Jhaveri, chairman, MSJ Capital, a New  Delhi-based investment advisor.

   “ But, assuming that the 50% limit stays, the  product may become popular if its given special tax status like the erstwhile  US-64, ” he said. Investors in NPS can choose the investment mix  between equity and fixed income instruments or allow the fund to move between  the two asset classes as per a pre-determined formula. The equity portion in the  NPS is allowed in invest only in a portfolio that replicates the Sensex or  Nifty, while the debt portion is invested in various government and corporate
bonds.

   “If I were to recommend this product to build a  retirement corpus, it will be in the debt portion, if not in the equity  portion,” said Om Ahuja, head-wealth management, Emkay Global Financial
Services. Six fund managers including UTI Mutual Fund,  State Bank of India, ICICI Prudential Mutual Fund, Kotak Mutual Fund, IDFC  Mutual Fund and Reliance Mutual Fund have been assigned with the task to open  and manage NPS accounts.