March 2016 – OneMint

How to invest in NPS Online – eNPS?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Last minute tax savers have only 4 days left to finalise their tax saving investments. If my previous post on NPS could help you take a decision to invest in it or not, then it is the time for you to act now. If you have finally decided to invest in NPS, then going for it in an offline manner won’t help you meet the March 31 deadline. But, you can still make it if you already have Aadhaar number with you and you can make online payment for it through internet banking or credit/debit card.

As most of you are aware by now, NPS provides you an exclusive tax benefit under section 80CCD (1B) which no other investment is allowed to do for you. You get a tax exemption of Rs. 50,000 under this section, which is over and above Rs. 1,50,000 exemption under Section 80C. So, if you fall in the 30% tax bracket, your investment of Rs. 50,000 in NPS saves you an additional Rs. 15,450 in taxes.

Where to go to make the NPS investment to Save Tax?

Many investors are still confused where to go or whom to contact in order to make this NPS investment. Although many banks/intermediaries/brokers have been providing such services, they all are advising their own procedures to follow to complete the registration. This is leaving many people more confused and the NPS registration process more complicated.

But, with eNPS, you will be provided all the support you require at the click of a mouse and you need not worry about which bank or intermediary to approach to and what procedures to follow in order to save your tax.

eNPS – How to go about it?

As you must be aware, as per SEBI guidelines, one is required to go through the KYC process to make any kind of market-linked investment. NPS also requires you to get it done before your account gets activated. You need to visit any of the NSDL appointed Point of Services (PoS) i.e. any of designated bank branches authorised to sell NPS or any of the intermediaries such as CAMS, Karvy, ICICI Securities, HDFC Securities or FundsIndia, and submit your PAN card, address proof, photograph and bank details along with the duly filled application form in order to get your KYC verification.

These banks/intermediaries would then forward your application and other documents to the Central Recordkeeping Agency (CRA), which would allot you a Permanent Retirement Account Number (PRAN) and open an NPS account in your name. This whole process usually takes 15-20 days as your PRAN gets generated and allotted to you.

However, with the introduction of eNPS, you are not required to visit any of the banks or intermediaries to submit your application form and other necessary KYC documents. As per the official website for eNPS, you have two options to register yourself online and I would like to explain you both the options here.

Option I – Registration on www.enps.nsdl.com using Aadhaar

If you have your Aadhaar number and your mobile number is linked to it, you need to register yourself online on https://enps.nsdl.com and make the payment through netbanking or credit/debit card. Your PRAN gets generated as soon as you register and make the payment.

For registration, you will be required to fill up the application form online and upload your signature in *.jpeg/*.jpg format. For authentication, a one-time password will be sent to your registered mobile number. The KYC process will be done using your demographic details and photo from the Aadhaar database. If desired so, you can replace your photo as well.

Option II – Registration using PAN (KYC Verification by Banks)

As many as 40 banks, including State Bank of India (SBI), Kotak Mahindra Bank, IndusInd Bank, Yes Bank, Canara Bank and IDBI Bank etc., are also providing such online services for KYC verification and PRAN generation. You can get the complete list all these 40 banks on the eNPS website.

If you have your bank account with any of these 40 banks, you have already got your PAN number or Aadhaar number linked to your bank account and you can make online payment using the bank’s internet banking facility or credit/debit card, then you can invest in NPS online using your bank’s services.

You just need to fill up your details online, upload your scanned photograph and signature in *.jpeg/*.jpg format and make the payment. As soon as you make the investment, a PRAN will be allotted to you.

Please note that these banks and intermediaries do get paid certain transaction charges or service charges for all these services they provide you through their own platforms. However, you can save these charges by routing your transactions through eNPS.

90 Days to Dispatch KYC Documents – This is the only thing you need to do in an offline manner. Central Recordkeeping Agency (CRA) gives you 90 days’ time to send your duly attested KYC documents to reach them for further authentication. You need to take a printout of the application form, paste your photograph, sign it in the block provided and post it to the CRA within 90 days from the date of PRAN allotment.

The PRAN Kit containing a PRAN Card, Internet Password (IPIN), Telephone Password (TPIN), Subscriber Master Report, Scheme Information Booklet along with a Welcome Letter will be sent to your registered address post that.

Credit Card Payment – Every year in March, I come across many of my clients/friends who face some kind of cash crunch, either due to an abnormally high tax deduction from their salaries or due to their last minute investments/payments to save tax. If you are one of them, then this is a good news for you. As mentioned above as well, eNPS allows you to make your investment through a credit card also. So, you can effectively defer your cash outflow by a few days or weeks using a credit card and still enjoy the tax benefit for the current financial year.

eNPS for Old Subscribers – Existing subscribers can also make their NPS contributions using the eNPS platform. You just need to visit the eNPS website and make the contribution authenticating your PRAN using the OTP sent to your registered mobile number. Again, you can opt for either internet banking or credit/debit card to make the contribution.

I hope the above information helps you do your tax saving investment in NPS, even if you have decided late to go for it. If you have any further queries or need more information regarding eNPS, you may contact Central Recordkeeping Agency (CRA) or NSDL e-Governance Infrastructure Limited at 1800 22 2080 or 022 – 40904242 or [email protected]

Your general views, queries and suggestions are always welcome here on this OneMint forum.

Should You Invest in NPS Post Budget 2016?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Budget 2016 has proposed a significant change in the taxation laws for National Pension Scheme (NPS). It has been proposed by the finance ministry to make 40% of your lump sum withdrawal to be tax exempt at the time of your retirement i.e. as you attain 60 years of age. But, does it make any sense to invest in NPS post this amendment or should you continue investing in equity mutual funds or PPF for your retirement years?

We all know that our contribution up to Rs. 50,000 in NPS provides us tax deduction under section 80CCD (1B). Unlike investments eligible for tax deduction u/s 80C, 80CCD (1B) provides an exclusive tax benefit for NPS. So, if you do not contribute in NPS, you need to pay tax as per your respective tax slabs. So, should you save tax by investing in NPS or just pay tax and then invest the remaining amount in equity mutual funds, PPF or debt mutual funds for wealth maximisation?

Honestly speaking, it is not an easy decision to take. To come to a conclusion, I’ll do a couple of comparative analysis here – one, comparing an investment in Equity Mutual Funds with NPS and the second one, comparing an investment in PPF with NPS. We will also have to make certain assumptions here based on which this analysis would come to a conclusion and you are most welcome to agree or disagree with my assumptions here because I am as human as you are and that is why there is enough scope of me committing mistakes as bad as anybody else on this earth.

Here are the assumptions I have made in this analysis:

You are 35 now and would retire after 25 years from now.
You are in the 30% tax bracket and will have to pay Rs. 15,450 as tax in case you decide not to invest Rs. 50,000 in NPS.
Equity Mutual Funds would generate on an average 13% annual returns for the next 25 years.
PPF would generate on an average 8.1% annual returns for the next 25 years.
NPS with 50% contribution towards equity, 25% contribution towards Government Debt and 25% contribution towards Corporate Debt would generate on an average 10.375% annual return for the next 25 years. To provide more clarity here, I have assumed 12% annual returns from equity, 8% annual returns from government debt and 9.50% annual return from corporate debt.

So, should you invest in NPS for saving Rs. 15,450 in tax?

Scenario I – Say No to NPS in the present scenario, as it is not advisable to invest in NPS even with the exclusive tax benefit it enjoys u/s 80CCD (1B). Your investment of Rs. 34,550 in diversified equity funds should result in a higher retirement corpus for you as compared to Rs. 50,000 invested in the NPS. Here is what you’ll have in your retirement corpus at the end of 25 years from now:

Portfolio I – NPS – 50% of Rs. 50,000 invested in equity index, 25% in Government securities and 25% in corporate debt – Retirement Corpus Rs. 57,43,171

Portfolio II – Equity Mutual Funds – 100% of Rs. 34,550 invested in diversified equity mutual funds – Retirement Corpus Rs. 60,75,621

Portfolio III – PPF – 100% of Rs. 34,550 invested in PPF – Retirement Corpus Rs. 27,70,607

So, the above calculation clearly shows that investing in diversified equity mutual funds would generate the highest retirement corpus for you, even after paying 30% tax + 0.90% education cess on your taxable income over and above Rs. 10 lakh.

But, there are certain points which you need to keep in mind here which are in favour of NPS. Firstly, from taxation point of view, I think the present situation is not the best one for NPS and it could only improve from hereon. There is still a lot of scope of improvement for making NPS a better product to invest in. Also, I think the present taxation laws are already highly favourable for equity mutual funds. So, let us have a look at some other scenarios and whether it is a ‘Yes’ or a ‘No’ for NPS in those scenarios.

Scenario II – Say No to NPS, if you are in the 20% or lower tax brackets. You should rather invest in equity mutual funds to generate a healthy corpus for your retirement years.

Scenario III – Say No to NPS, even if you think this government or some other government will increase the exempt portion of your lump sum withdrawal in NPS from the current 40% to 100% or any percentage between 40% and 100% during the next 25 years.

Scenario IV – Say Yes to NPS, if you believe in the theory of “one bird in hand is better than two in the bush”. If you decide not to invest in NPS to save Rs. 15,450 today, you’ll have to pay it to the government and you’ll be left with Rs. 34,550 only to invest. With NPS, your first tax outgo will happen when you retire at the age of 60. Then also, if you withdraw 40% of your retirement corpus as lump sum, it is tax-free and invest the remaining 60% for buying an annuity, you are not required to pay any tax on that 60% as well. You’ll be required to pay tax only on the annuity income you would receive on your investment.

On the other hand, if you decide not to invest in the NPS, you’ll have to pay a tax of Rs. 15,450 to the government and your investment of Rs. 34,550 in equity mutual funds will take a long 25 years to beat NPS as far as a higher retirement corpus is concerned.

Scenario V – Say Yes to NPS, if you fall in the 30% tax bracket and you think this government or some other government will make long term capital gains (LTCG) on equity mutual funds taxable anytime during the next 25 years. Even a 10% LTCG tax on equity mutual funds will make NPS a better retirement product to invest in.

Scenario VI – Say Yes to NPS, if you are hopeful that this government or some other government would allow you to invest more than 50% of your Rs. 50,000 in equity portion of NPS. Personally I think there should an option allowing you to invest 100% of your money in equity. That would make NPS an attractive investment for me to save tax.

Scenario VII – Say Yes to NPS, if you are hopeful that this government or some other government would give you the liberty to invest 60% of your lump sum withdrawal anywhere you want and make it tax exempt as well.

Scenario VIII – Say Yes to NPS, if you are a conservative investor and don’t want 100% of your investment to be made in equities. With NPS, even 50% of your investment in equity index would result in a healthy retirement corpus which should be very close to the expected retirement corpus with 100% investment in equity mutual funds.

NPS vs. Equity Mutual Funds vs. PPF – Other Factors

NPS - Other Factors

There could be other such scenarios based on which your decision to invest in NPS could change. If you think I have missed any such significant scenario, then please share it here, I’ll incorporate that also to make it an even more comprehensive analysis.

Post Office Small Savings Schemes – FY 2016-17 Interest Rates – PPF @ 8.10% & Sukanya Samriddhi Yojana @ 8.60%

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Last Year’s Post – Post Office Small Saving Schemes – FY 2015-16 Interest Rates – PPF @ 8.70% & Sukanya Samriddhi Yojana @ 9.20%

In a move which could disappoint many small savers here in India, Finance Ministry today decided to reduce interest rates on many of its small saving schemes, including Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC) and Senior Citizen Savings Scheme (SCSS) among others. These rates will be effective April 1, 2016 and will be subject to a quarterly revision based on a new formula to determine these rates.

Here you have the table having all the small saving schemes with their applicable interest rates and tax benefits for the next financial year 2016-17:

Public Provident Fund (PPF) – Rate Cut from 8.7% to 8.1% – There has been a significant cut in the interest rate offered by PPF, India’s most popular small savings scheme. PPF will earn you 8.10% for the next financial year as compared to 8.7% for the current financial year. However, interest rate on PPF continues to remain tax-exempt on maturity and investment up to Rs. 1,50,000 will keep getting exemption under section 80C.

Sukanya Samriddhi Yojana (SSY) – Rate Cut from 9.2% to 8.6% – Government’s pet scheme for girl child, Sukanya Samriddhi Yojana, has seen a rate cut to 8.60% from its present rate of 9.20%. But, there is still a gap of 0.50% between this scheme and PPF, which would likely keep its popularity intact.

Interest earned on Sukanya Samriddhi Yojana is also tax-exempt on maturity and investment up to Rs. 1,50,000 will keep getting exemption under section 80C.

Senior Citizens Savings Scheme (SCSS) – Rate Cut from 9.3% to 8.6% – Senior citizens will also feel disappointed as the interest rate on Senior Citizen Savings Scheme has also been reduced to 8.60% from 9.30% earlier. The interest earned on this scheme is taxable and subject to TDS as well. But, the investment made gets you a deduction of up to Rs. 1,50,000 under section 80C.

Post Office Monthly Income Scheme (POMIS) – Rate Cut from 8.4% to 7.8% – Post Office Monthly Income Scheme will also have a steep cut in interest rate from an earlier 8.40% to 7.80% effective April 1. Following this rate cut, Post Office MIS will go out of favour with many of the investors.

National Savings Certificates (NSCs) – Rate Cut from 8.5% to 8.1% – Effective December 20, 2015, the government stopped issuing 10-year NSCs. Now even 5-year NSCs will have a rate cut, from 8.50% to 8.10%. Your investment in NSCs will keep giving you tax exemption under section 80C.

Kisan Vikas Patra (KVP) – Tenure Raised from 100 Months to 110 Months – Your investment in KVP was promised to get doubled in 100 months earlier. But, from April 1, you’ll have to wait for 10 months more to get the same benefits. Effectively, this scheme will earn you 7.85% now.

Impact of Rate Rationalisation on Small Savers, Borrowers and Indian Economy

Though the government would be criticised badly for this move and the opposition parties would try to take maximum benefit out of small savers’ emotions, I would term it as one of the best moves by the Modi Government. Why am I saying this? This move will send the right signals to the global investors as well as to the Reserve Bank of India (RBI) that the government is serious about removing anomalies existent in our systems and also meeting its fiscal deficit target of 3.5%. This move, along with an expected rate cut by the RBI, is going to put more pressure on the lenders to cut lending rates in the system. It will also reduce the borrowing costs of the government, as well as many of the corporates which are currently burdened with high debt in their books.

CPI Inflation, which matters to you and me the most and was ruling in double digits during the UPA tenure, has come down to 5.18% in February 2016. WPI Inflation, which measures wholesale prices of goods and services, has been ruling in the negative zone for a very long time now. This fall in inflation is a result of a slump in the global commodity prices and crude oil prices.

Small savers need to understand that interest rates on deposits and other investments have also come down in the last 2-3 years. During FY 2013-14, our favourite ‘AAA’ rated tax-free bonds carried as high as 9.01% rate of interest. These same ‘AAA’ rated tax-free bonds carried a maximum coupon of 7.69% in the current financial year. So, effectively a fall of 1.32%.

If you compare this fall of 1.32% with a 0.60% reduction in PPF’s rate of interest or 0.40% in NSC’s rate of interest, I think the cut is truly justified. Rest I think it is very difficult to keep everyone happy in the country and at the same time, carry out economic reforms for an overall development.

Ahead of polls in five states in April-May, I would call it a truly bold move by the government. This act of rationalising interest rates will benefit the borrowers immensely, which in turn will create a right balance in the economy.

IRFC 7.64% Tax-Free Bonds – Tranche II – March 2016 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

2016 so far has seen a good amount of volatility in all the major financial markets in the world. The main cause of this volatility has been China. After having many years of high GDP growth, Chinese economy is taking a breather. How long this slowdown would last, it is something which only God can answer. In these uncertain times, risk averse investors want safety of their hard earned money and tax efficiency of their investments. Tax Free Bonds fulfil both of these requirements.

To satisfy our hunger for tax-free bonds, IRFC will join the company of NABARD from Thursday, March 10th. The issue will remain open for just 3 days to get closed on March 14. This is the shortest period of time a company has decided to keep its issue open even before it actually opens. It seems the merchant bankers are confident enough to get the required subscription numbers within a day or two, and we all know that they are right in their calculations.

Here are the salient features of IRFC Tranche II of Tax Free Bonds:

Size of the Issue – Indian Railways has been spending a huge amount on expanding its network and upgrading its existing infrastructure. IRFC is one of the sources through which Indian Railways gets its required funds for such high expenditure. IRFC has already raised Rs. 7,050 crore in the current financial year by issuing these tax-free bonds. To partly meet its funds requirements, IRFC will raise another Rs. 2,450 crore in this issue.

Rating of the Issue – CRISIL, ICRA and CARE have assigned ‘AAA’ rating to this issue and consider it to be the safest from timely payment of its debt obligations, including interest and principal investment. Moreover, these bonds are ‘Secured’ in nature and certain fixed assets of the company will be charged equivalent to the outstanding amount of the bonds.

Coupon Rates on Offer – IRFC is offering yearly interest rate of 7.29% for its 10-year option and 7.64% for the 15-year option to the retail investors investing less than or equal to Rs. 10 lakh. These rates exactly match the rates offered by NABARD in its issue which is getting launched today.

For the non-retail investors, coupon rates will be lower by 25 basis points (or 0.25%) for the 10-year option at 7.04% and 29 basis points (or 0.29%) for the 15-year option at 7.35%.

NRI/FPI/QFI Investment Allowed – This issue will try to quench the thirst of some Non-Resident Indians (NRIs), Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) as they have been allowed to invest in this issue either on a repatriation basis or a non-repatriation basis.

Investor Categories & Allocation Ratio – As compared to the earlier issues, this issue has a higher percentage allocation of 60% for the retail investors and as compared to the NABARD issue, a slightly higher percentage allocation of 15% for the high networth investors.

As always, the investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 10% of the issue is reserved i.e. Rs. 245 crore

Category II – Non-Institutional Investors (NIIs) – 15% of the issue is reserved i.e. Rs. 367.50 crore

Category III – High Net Worth Individuals including HUFs – 15% of the issue is reserved i.e. Rs. 367.50 crore

Category IV – Resident Indian Individuals including HUFs – 60% of the issue is reserved i.e. Rs. 1,470 crore

Allotment on First Come First Served Basis – Subject to the allocation ratio, allotment will be made on a first come first served (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

Listing & Allotment – IRFC has decided to get these bonds listed on both the stock exchanges i.e. on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE). The bonds will get allotted and listed within 12 working days from the closing date of the issue.

Demat Account Not Mandatory – It is not mandatory to have a demat account to apply for these bonds. Investors have the option to subscribe to these bonds in physical form also. Whether you apply for these bonds in demat or physical form, the interest payment will still get credited to your bank account through ECS.

Also, even if you get these bonds allotted in an electronic form and sometime in future you decide to close your demat account, you will have the option to get them rematerialized in physical/certificate form.

No Lock-In Period – These tax-free bonds are freely tradable and do not carry any lock-in period. The investors may sell them at the market price whenever they want after these bonds get listed on the NSE and BSE.

Interest on Application Money & Refund – Successful allottees will earn interest at the applicable coupon rates on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Minimum & Maximum Investment – Investors are required to put in a minimum investment of Rs. 5,000 in this issue i.e. at least 5 bonds of face value Rs. 1,000 each. There is no upper limit for the investors to invest in this issue. However, an investor investing more than Rs. 10 lakhs will be categorized as a high networth individual (HNI) and will get a lower rate of interest as applicable.

Interest Payment Date – IRFC will make its first interest payment on October 15 this year. Subsequent interest payments will also be made on October 15 every year.

Should you invest in this issue?

For a large number of retail investors, tax-free bonds have remained their favourite investment option for all these years since they first got allowed to be issued in 2011-12. As the finance ministry has decided to end this channel of fund raising for all these big and reliable government companies in the infrastructure financing or development space, we all have been very disappointed.

But, there is nothing we can do about it. The only thing we can do is to utilise these last couple of opportunities to subscribe to these bonds and just hope for the government to reintroduce these bonds again in the next year’s budget. Till then, risk-averse investors should subscribe to these bonds and other investors should invest their money in good mutual funds for infrastructure development to gather pace through a different funding channel.

Application Form for IRFC & NABARD Tax Free Bonds – Resident Indians and NRIs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in IRFC or NABARD tax-free bonds, you can contact/whatsapp me at +919811797407 or mail me at [email protected]

Sovereign Gold Bond Scheme – Tranche III – March 2016 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

The government is doing all it could do to curb the demand as well as imports of physical gold, but the government is yet to understand the psychology of people living here in India. We love our country, but we do not leave any chance to spread litter on our roads, parks and all other places wherever we can. We want ‘Azaadi’ within India, despite having all the Azaadi to burn and destroy public and private properties and commit the most condemnable offences such as rapes, murders etc.

We are very patriotic, but we do not leave any chance to leave our country and spend a comfortable life outside India for the rest of our life cursing the Indian systems. We consider Indian culture to be the best, but we do not leave any chance to make fun of our Prime Ministers.

To cut it short, we need to understand that if any of our measures are not working in our favour to achieve any of our targets, we need to rework on our strategy to achieve it and that is what the government has not been able to do in case of its flagship gold scheme – Sovereign Gold Bond Scheme. Despite the gold investment giving negative returns in the past two years or so, the lure of buying gold in India is not going down and the government has failed to curb the demand of physical gold.

After two consecutive unsuccessful attempts, the government will be launching its third tranche of gold bonds from Tuesday, 8th of March. The scheme will remain open till March 14 and the bonds will be issued on March 29, 2016.

Here are some important features of this scheme:

Issue Price – The investors can invest in these bonds at Rs. 2,916 per gram of gold. The issue price this time is higher than the previous two issues. Issue price for the first tranche was fixed at Rs. 2,684 per gram of gold and that of the second tranche was Rs. 2,600 per gram of gold.

The government could raise only Rs. 246 crore from its first issue in November issuing bonds with around 916 kg of gold and Rs. 798 crore from the second issue in January issuing bonds with around 3,071 kg of gold.

Issue Price Methodology – The issue price has been fixed on the basis of simple average of closing price for gold of 999 purity of the previous week (February 29, 2016 to March 4, 2016) published by the India Bullion and Jewellers Association Ltd. (IBJA).

Coupon Rate @ 2.75% p.a. – Sovereign Gold Bonds offer two streams of returns – one in the form of regular interest income @ 2.75% per annum payable semi-annually and the other in the form of increase or decrease in the market price of gold.

Tenor of Investment – These bonds will be issued for a period of 8 years from the allotment date, which is March 29, 2016, with an exit option from the 5th year on the interest payment dates.

Premature Redemption – In case of premature redemption (after 5 years), investors can approach the concerned intermediary 30 days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned intermediary at least one day before the coupon payment date. Redemption proceeds will be credited to the customer’s bank account.

Taxation – Budget 2016 has tried to make these bonds more attractive from taxation point of view. As per the Budget speech “It is proposed to provide that redemption by an individual of Sovereign Gold Bond issued by Reserve Bank of India under Sovereign Gold Bond Scheme, 2015 shall not be charged to capital gains tax. It is also proposed to provide that long terms capital gains arising to any person on transfer of Sovereign Gold Bond shall be eligible for indexation benefits”.

So, as an individual, whenever you redeem these gold bonds after holding them for 5 years, you are not liable to pay any capital gain tax.

Minimum and Maximum Investment – Investors are required to buy a minimum of 2 units of these bonds i.e. 2 grams of gold or a minimum investment of Rs. 5,832. On the other hand, you can buy a maximum of 500 units of these bonds or 500 grams of gold, which works out to be Rs. 14,58,000.

NRI/QFI Investment Not Allowed – Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in these bonds. Only Resident Indian Entities, including individuals, trusts, universities and charitable institutions are eligible to invest in these bonds.

Transferability – Though these bonds are tradable, but trading is allowed only once it is notified by the Reserve Bank of India (RBI). Bonds can be transferred also by execution of an Instrument of Transfer, in accordance with the provisions of the Government Securities Act.

Sovereign Gold Bonds vs. Gold ETF vs. Physical Gold – A Comparative Chart

As you can check from the table above, almost all the points of comparison are in favour of these Sovereign Gold Bonds, except the liquidity thing. That too, I think is not a big issue as and when the RBI notifies these bonds to trade on the stock exchanges. So, if you are bullish about the gold prices rising from hereon and/or if your asset allocation permits you to invest in gold or gold derivatives, I think there cannot be any better option other than these Sovereign Gold Bonds. Personally, I think the government should first cut high import duties on gold to make them attractive for me from investment point of view.

Do you think these gold bonds make a good investment option for you? If ‘Yes’, please share why you think so. If ‘No’, please let us know why you think so. Also, in case you think I have missed anything in the post above, please let me know. I will incorporate that point in the article as soon as possible.

NABARD 7.64% Tax-Free Bonds – March 2016 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Tax-Free Bonds, which carry coupon rates as per the G-Sec yield in the market, have suddenly become more attractive post this year’s budget. Finance Minister Arun Jaitley in his Budget speech announced his target to contain the government’s fiscal deficit at 3.5% of GDP in 2016-17. This lower than expected fiscal deficit has resulted in a sharp fall in bond yields in the past one week or so.

Moreover, these bonds will not be available in 2016-17 and probably afterwards as well. This will increase demand for these bonds multifolds. So, before these bonds become part of history, we have two such issues left – one is from NABARD and the other would be from IRFC. I will cover the IRFC issue in another post, let’s have a look at the salient features of the NABARD issue.

Issue Opening & Closing Dates – The issue is opening for subscription on 9th of March, the coming Wednesday and will get closed on March 14.

Size of the Issue – NABARD is authorized to raise Rs. 5,000 crore from tax free bonds this financial year, out of which the company has already raised Rs. 1,500 crore by issuing these bonds through a private placement. NABARD will raise the remaining Rs. 3,500 crore in this issue.

Coupon Rates on Offer – 10-year and 15-year G-Sec yields have fallen in the last few days, which has resulted in a fall in the coupon rates of these tax-free bonds as well. This issue will carry 7.29% for 10 years and 7.64% for 15 years.

For the non-retail investors, coupon rate will be lower by 25 basis points (or 0.25%) for the 10-year option at 7.04% and 29 basis points (or 0.29%) for the 15-year option at 7.35%.

Investor Categories & Allocation Ratio – The investors have been classified in the following four categories and each category will have certain percentage of the issue size reserved during the allocation process:

Category I – Qualified Institutional Bidders (QIBs) – 15% of the issue is reserved i.e. Rs. 525 crore

Category II – Non-Institutional Investors (NIIs) – 15% of the issue is reserved i.e. Rs. 525 crore

Category III – High Net Worth Individuals including HUFs – 10% of the issue is reserved i.e. Rs. 350 crore

Category IV – Resident Indian Individuals including HUFs – 60% of the issue is reserved i.e. Rs. 2,100 crore

60% Issue Reserved for Retail Investors – This is something very unique to this issue. As we all know, the retail investors were getting 40% of the bonds reserved in all previous issues. This will be the first issue in which the retail investors will be allotted 60% of the total issue size. I think this is a good step in favour of the retail investors.

NRI/QFI Investment NOT Allowed – Like most of the past issues, Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in this issue as well.

Rating of the Issue – CRISIL and India Ratings consider investing in these bonds to be safe and that is why they have assigned ‘AAA’ rating to the issue. Moreover, these bonds are ‘Secured’ in nature i.e. in case of any default, the bondholders would carry a right to make claim on certain assets of the company.

Listing & Allotment – NABARD has decided to get these bonds listed only on the Bombay Stock Exchange (BSE). The company will allot the bonds and get them listed within 12 working days from the closing date of the issue.

Demat A/c. Not Mandatory – It is not mandatory to have a demat account to apply for these bonds. Investors have the option to subscribe to these bonds in physical form as well. To apply in physical or demat form, the applicant is required to fill the physical form and attach the KYC documents along with the investment cheque. KYC documents include a self-attested PAN card copy, a self-attested address proof copy and a cancelled cheque.

Whether you apply for these bonds in demat or physical form, the interest payment will still be credited to your bank account through ECS. Moreover, even if you get these bonds allotted in your demat account, you have the option to rematerialize your holding in physical/certificate form if you decide to close your demat account in future.

No Lock-In Period – After these bonds get listed on the stock exchanges, these tax-free bonds are freely tradable and do not carry any lock-in period, the investors can sell them at the market price whenever they want.

Interest on Application Money & Refund – Successful allottees will earn interest at the applicable coupon rates i.e. 7.29% p.a. for 10 years and 7.64% p.a. for 15 years, on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Interest Payment Date – NABARD will make its first interest payment exactly one year after the date of allotment and the date of allotment will be announced as the company allots its bonds to the successful applicants.

Record Date – For the payment of interest or the maturity amount, record date will be fixed 15 days prior to the date on which such amount is due to be payable.

Should you invest in this issue?

60% of the NABARD issue i.e. Rs. 2,100 crore is reserved for the retail investors. Not 100% sure, but I think it should take at least a couple of days for this issue to get subscribed in the retail investors category. I think many investors would have got the NHAI refunds credited by then.

As the Finance Ministry has a view that these tax-free bonds create some kind of imbalance in the market, especially for our commercial banks, they have decided not to extend such support to these issuers from the next financial year onwards. That makes this issue and the IRFC issue to be the last two opportunities for the investors in the higher tax brackets to make their investments. Such issues will not be available for at least next 18 months or so, even if the government decides to allow their issuances in Budget 2017. So, if you want to invest in these bonds and earn tax-free income, you need to act now and fast.

Application Form for NABARD & IRFC Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in NABARD or IRFC tax-free bonds, you can contact/whatsapp me at +919811797407 or mail me at [email protected]

EPF, PPF, NPS Withdrawal Tax – Government Clarifications

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Budget 2016 has created a 360º chaos as far as EPF, PPF and NPS withdrawal tax proposals are concerned. We had a series of clarifications from various concerned departments of the finance ministry today before we officially had one from Mr. Jayant Sinha, the Minister of State for Finance.

So, here is the eleven point clarification regarding the changes made in the tax treatment of EPF, PPF and NPS:

1. Thought behind this Proposal – The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.

2. 40% Withdrawal will be Tax Exempt – Towards this objective, the Government has announced that 40 per cent of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.

3. Entire Corpus is Tax Exempt if 60% or more Corpus is invested for Buying Annuity – It is expected that the employees of private companies will place the remaining 60 per cent of the Corpus in Annuity, out of which they can get regular pension. When this 60 per cent of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

4. Corpus is Tax Exempt in the Legal Heir’s Hands – The government in this Budget has also made another change which says that when the person investing in annuity dies and when the original corpus goes in the hands of his heirs, then again there will be no tax.

5. Idea behind this Mechanism – The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.

6. A Large No. of Subscribers Remain Unaffected – The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.

7. Applicable only to Highly-Paid Employees in the Private Sector – However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60 per cent in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40 per cent.

8. PPF remains Unaffected – There is no change in the existing tax treatment of Public Provident Fund (PPF).

9. No Monetary Ceiling At Present – Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12 per cent of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10 per cent of salary.

10. Monetary Ceilings Introduced – Now the Finance Bill 2016 provides that there would be monetary ceiling of Rs. 1.5 lakh on employer contribution considered with the ceiling of the 12 per cent rate of employer contribution, whichever is less.

11. Government Considering Suggestions – We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.

Please share you thoughts about any of these points or if you have any query regarding any of the proposals.