Investing in National Pension Scheme for availing tax deductions – Is it worth it?

National Pension Scheme (NPS) has become famous amongst armed forces community for providing additional tax deduction of Rs 50,000 (that is a yearly tax saving of Rs 15,000 per year in 30% tax bracket) under 80CCD(1b) apart from Rs 1.5 lacs under 80C.

Since NPS is being invested for the reason of tax saving by many people, we would like to uncover one more tax deduction linked with NPS for you.

Contribution made by an employer is additionally allowed under Section 80CCD(2) subject to a ceiling of 10% of the salary (14% for central government employees), but limited to an aggregate of Rs 7.5 Lakhs in a year by the employer towards employee provident fund (EPF), NPS and superannuation. In case of any excess beyond this limit, the excess is treated as taxable perquisite.

While deductions under 80C and 80 CCD(1b) are available to all investors, 80CCD(2) is only available for salaried employees.

You must be like – WOW! Huge tax deduction is available in NPS as an investment option; but remember this belongs to EET tax regime (EET – Exempt when you contribute, Exempt while it remains invested but Taxable when you withdraw) unlike DSOPF / PPF which belong to EEE category (subject to rules). NPS is essentially a tax-deferral scheme – the tax pain happens later, not right now.

Also, only 60% accumulated corpus of NPS can be withdrawn tax free and the balance 40% has to be compulsorily utilized for purchasing an annuity plan from an insurance company yielding nominal returns of 4%-5%, and that too taxable.

Retirement oriented mutual fund schemes are much better alternative to NPS, which come with a lock in of just 5 years, competitive tax efficient returns and without any compulsion of buying any nominal taxable return yielding annuity plan.

Don’t get trapped into the cobweb of tax deductions. Invest wisely..!!

(Contributed by Ayushi Gupta, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)

There’s a lot of discussion about ‘ESG’ Mutual Funds – what is this?

We all keep on raising our voice that Govt should do this, NGOs should do that but are we ourselves doing enough? Should we be concerned only with the returns that have been achieved by our investments or how ‘sustainably’ the returns have been achieved should also be our priority?

ESG Mutual Funds are creating a lot of buzz since last year because they invest in companies that are socially responsible and wherein the investment process includes the evaluation of factors like Environmental (E), Social (S), and Governance (G) [ESG] practices of the companies. Eg, Amazon or Flipkart might be delivering great stuff to our houses at rock-bottom prices, but the impact that their practices have on lakhs of small Kirana stores dotted across the country is also something a responsible citizen should look at. ESG companies have business models that can navigate the sustainability requirements and, importantly, can help investors generate wealth in the long term. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

I want to give back to society and the environment. Should I invest in ESG Funds?

Now, this is a very important question. ESG, as a concept, is easy to understand, as environmentally sustainable companies do hold promise. We have compared portfolios of few ESG funds with already existing categories of mutual funds, which the same fund houses have to offer. We found that there is a major overlap between the stock holdings as on date and hence there is no great shake in shifting to ESG funds, unlike in the developed countries where there could be major holding differences.

ESG concept is at a nascent stage in India but has a promising future. Currently, even by investing in the vanilla Flexi-cap funds, you are already getting an ESG flavour in your portfolios.

Hence, for now, it is better to wait for a few years before proper socially responsible ESG investing becomes available in India.

(Contributed by Nidhi Dogra, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)

How will a financial plan ease your life?

A toss plays a crucial role and every cricket fan knows its importance.
Commentators often ask a common question to the team batting first, “What do you think will a competitive score to win?”

And based on the pitch / ground / weather / opposition team’s analysis, the captain shares a number / target, which he/she thinks would be in the minds of their team players while coming on the field.

Similarly, the team batting second have a target in front of them set by the opposition team and they try to maintain an average run rate fast enough to ensure a win.

No one comes with a blank mind. Proper planning increases the probability of your success.

When it comes to your life’s goals (children’s education / marriage / home / vacations etc), proper financial planning is required. Proper Asset-Liability / Cash Flow / Insurance / Debt Analysis etc helps you plan the roadmap to achieve your financial goals comfortably.

How much to invest? Where to invest? Where do you need to control your expenses? How much life insurance is required? – and many more such questions get answered and an individual is able to live an anxiety free life.

But success also requires good implementation / execution. Just planning is not enough. And when it comes to finances you should not take a chance even if you are a pro in finance.

A doctor / surgeon too hesitates in doing a surgery of his/her family member because emotions come into play and professionalism could take a back seat.

Do approach a competent financial planner and get your professional financial planning in place so that you do not commit mistakes due to your emotions and life does not move in fits and starts.

(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

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