Investing Insights. Decoding Budget sops for NPS and MF investors

The Budget has fully exempted from tax the portion of the NPS corpus that the subscriber can withdraw on retirement.

In NPS, on attaining the retirement age of 60, the subscribers are allowed to withdraw 60 per cent of their accumulated corpus as lump sum, while the remaining 40 per cent should be used to buy the annuity plan.

The Budget has made the entire 60 per cent of the withdrawable NPS corpus, tax-free. Earlier, only 40 per cent was tax-free, while 20 per cent was taxable at the investor’s slab.

For instance, assuming that you have accumulated ₹10 lakh in your NPS account. You can now withdraw ₹6 lakh as tax-free corpus. Earlier, of the ₹6 lakh, only ₹4 lakh was tax-free. The remaining ₹2 lakh was taxed as per your slab. If you were in the 30 per cent category, you would have paid ₹60,000 (plus cess) as tax, thus leaving you with a net lump sum of only ₹5.4 lakh.

The new rule has now enabled the subscribers to channelise a larger amount into suitable avenues for regular income, post retirement.

Secondly, the investment made in the optional NPS Tier-II account is now eligible for tax deduction up to ₹1.5 lakh under Section 80C of the Income-Tax Act. To enjoy the tax benefits, the lock-in period is three years.

However, the 80C tax benefit is allowed only for central government employees.

Subscribers registered under NPS will, by default, have a Tier-I account where they can park their regular contribution and save for retirement. The Tier-II accounts are optional. While the Tier-I account is non-withdrawable (barring few exceptions), the Tier-II accounts are more or less similar to mutual fund accounts and savings bank accounts, wherein the subscribers are allowed to invest and redeem at any time.

Thirdly, the Budget has also allowed deduction under Section 80C for employer’s contribution up to 14 per cent of salary from the current 10 per cent, in the case of central government employees.

80C benefit for ETFs

The Budget has announced that investment in CPSE related Exchange Traded Funds (ETFs) will be eligible for Sec 80C benefits on the lines of equity linked savings scheme (ELSS). ELSS are equity-oriented mutual funds with a lock-in period of three years and are eligible for 80C benefit. ETFs are passively-managed mutual fund schemes traded on the BSE and the NSE, like other shares. Through demat accounts, investors can buy and sell ETF units at the prevailing market prices.

Tax sops for equity FoFs

Also proposed is a concessional rate of short-term capital gains (STCG) tax to certain equity-oriented fund of funds (FoFs).The concession is available if these FoFs in turn invest in funds set up for disinvestment of Central Public Sector Enterprises.

Normally, FoFs are taxed as non-equity funds both for short- and long-term gains. However, Budget 2018 brought in taxation of long-term capital gains (LTCG) of FoFs that invest more than 90 per cent in units of equity ETFs and equity-oriented funds, on a par with equity funds.

Budget 2019 has extended the beneficial treatment that these FoFs receive to short-term capital gains as well, but restricted it to FoFs investing in funds set up for disinvestment of CPSEs.

Currently, ICICI Prudential Bharat 22 FoF and Reliance Junior BeES FoF are such FoFs available in the market, qualifying as equity funds for tax purposes. Launched in June 2018, ICICI Prudential Bharat 22 FoF invests predominantly in the units of ICICI Pru Bharat 22 ETF. Reliance Junior BeES FoF was launched in February 2019 and invests primarily in the units of Reliance ETF Junior BeES.

Considering the above budget statement, ICICI Pru Bharat 22 FoF will be eligible for such concessional STCG rate.