Revised DTC proposal may boost National Pension Scheme's popularity

MUMBAI: 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.