With changes in withdrawal limits of EPF and taxation changes to NPS, here are tips to tweak your long-term saving strategy for the sunshine years
Though the finance minister has reinstated the taxation move on Employees Provident Fund (EPF) announced during the Budget 2016-17, the sword of uncertainty hangs as to whether a fresh taxation strategy is being chalked out. Arun Jaitley had hinted that, “There are various other suggestions, which can also achieve the same policy objective of encouraging people to join the pension scheme.”
The decision to restrict withdrawals of the employer’s contribution and interest earned on it from EPF until the age of 58 years too has put financial plans of many in a tizzy. “Things will become difficult due to the restriction of 58 years no withdrawal norms as people invest in EPF and have goals linked to it such as buying a house in the native place, children’s education or marriage and their money is stuck now,” says Vivek Damani, founder of Jeevan Prabandhan financial advisory.
Apart from taxation, the reduction in interest rates too would call for higher investments for retirement, say experts. “There might be fleeting changes – the changes announced under Budget, interest-rate linked changes that life is going to throw up. Interest rate itself would be low and the compounding will be at a lower rate. Hence, reaching the desired corpus would be difficult,” as per Suresh Sadagopan, who runs Ladder7 Financial Advisories.
Higher contribution would be needed to meet the cash flows if taxation mars the retirement picture. “We would be assessing the necessity to invest more for retirement, considering taxation of select instruments that were tax-free so far,” reveals Damani.
Apart from higher contributions for retirement, other changes would be required, says Sadagopan. “To ensure cash flow for goals aren’t impacted, we would have to scale down the goals, postpone retirement or save more, if surplus permits,” he adds.
But where should these funds be invested? Though the EPF taxation has been stalled, advisors are quizzing whether to continue with the voluntary contribution to provident funds. “I would be re-thinking on the voluntary provident fund strategy for my salaried customers,” says Damani.
Apart from EPF, there are other avenues one should consider.
Under Budget 2016-17, NPS was given a tax-benefit edge, bringing it on par with other pension scheme, by exempting tax on 40% of the amount accumulated at 60 years. If you take the annuity option, then apart from the 40% tax-free amount, you also get additional money saved from taxes.
The changes have led Sadagopan to strongly recommend NPS investments to his clients. “NPS has inherent merits and these merits outweigh the negatives. With the changes, NPS is a much better vehicle leaving apart the taxable annuity portion. There are seven fund managers under NPS and you can decide the one you want to invest with. It is like investing in different mutual funds, where you can switch if you notice consistent underperformance.” says Sadagopan.
One can even contribute money they don’t need for long-term into Tier II account of NPS as the charges of investing in NPS are potentially 20-25% lower at 0.01% of the corpus charged for fund management, Sadgopan recommends.
A higher portion of NPS can be tax-free provided one purchases immediate annuity plans using 60% of the amount. Annuity is an investment vehicle wherein wealth accumulated over a period is distributed over the retirement years until the death of self or spouse. The problem with annuity products available is that the returns range between 4-7%. More so, the pension paid out from annuity funds are taxed as per income bracket. Presently, bonds that are offering tax-free yield of 7.29-7.64% would be better placed than taxable annuity rates, suggest advisors.
Retirement savings MF
There is another category of retirement funds offered by fund houses, where annuity investment isn’t mandatory. Experts advise against them. “Instruments that have an open architecture are better than the recently launched retirement plans as they charge an exit load of 1-3% if one withdraws before the age of 60 years. This may prove to be restricting factor for not withdrawing money meant for retirement, but there is no fix available if you see underperformance,” Damani says.