NPS and budget crumbs

Am doing this posting because a few journalists wanted me to talk about the Union Budget and the NPS. What a joke! There was NOTHING in the budget for the NPS at all. One cosmetic change is ‘on share purchases the NPS does not have to pay service tax’ – the impact at best can only be marginal. Service tax for a ‘buy only’ fund is not really a source of worry. And only the service tax has been abolished – the broker will continue to charge the stamp duty..and other charges!

Secondly Pranab Da made the Income of the NPS ‘tax-free’. Again a joke – this should have been there in the original itself. NPS is a collective investment product, so the income in the hands of the organisation HAD to be tax free – like mutual fund income is exempt under section 10 of the Income Tax Act. So no big deal here also!

No dividend DISTRIBUTION tax on the dividends paid to the NPS! this will mean a higher dividend payout for the NPS to receive – impact at best marginal.

WHAT IT SHOULD HAVE DONE: Clarified that when you commute the pension the amount is received TAX FREE. For e.g. If i have Rs. 12 lakhs in the portflio when I retire – and I decide to buy an annuity for Rs. 9 L and take cash of Rs. 3 lakhs, CLARIFY that the Rs. 3 lakh is TAX FREE.

Allow me to partially buy annuity. If I am 60 years of age and the interest rates prevailing for annuities is 4 % p.a. I should be allowed to buy annuity with just say Rs. 2 lakhs. The other 10 lakhs should be in the fund. In year 2 interest rates for annuity is 6.3% – and I am happy, I should be allowed to buy annuity with Rs. 5 lakhs….so my annuity is also spread over a 5-6 year buying period thus covering all interest cycles.

Bring it on par with mutual fund pension plan – Templeton and UTI are both taxed at 10% – he could have introduced a 5% withdrawal tax and made it free of income tax. This would have ensured an easy and simple tax structure and efficient way of collecting. Remember 5% of the total withdrawal – capital and the appreciation is not an unfair rate. For the mutual funds it is 10% CAP GAINS only.


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