It’s time to rid the EPFO of investment opacity

The decision of India’s Employees’ Provident Fund Organization (EPFO) board to split its payout for 2019-20 into two parts—8.15% from its bond investments right now and 0.35% from its equity investments later this year—was unprecedented alright. But it was no big surprise, given the poor performance of its stock portfolio. Provident fund (PF) subscribers should not fret too much. Even if they must content themselves with just the main tranche, a rate of 8.15% is superior to anything a bank deposit could have offered in these times of low interest rates. In fact, some economists have argued that PF account holders are rewarded far too handsomely, distorting credit markets by getting in the way of efforts by the central bank to cheapen loans. It is an argument that holds some weight, and so the state-run manager of our retirement kitty has been generous. Fund management is not about generosity, however, and its deferral of the equity slice of its annual payout is yet another sign that it is woefully out of step with the times.

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Opinion | Only more sunshine will stop the rot

The Infrastructure Leasing and Financial Services (IL&FS) contagion is spreading. After mutual funds and non-banking financial companies (NBFCs), it is the turn of the exempt pension funds to be worried about their investment in bonds from the beleaguered institution. The story is: as non-performing asset-laden banks dried up lending to firms, these companies turned to other sources of money as a firm needs working capital to keep the wheels of business turning. Money comes from two sources—extra funds that other firms have and household savings. Institutions such as banks, mutual funds, insurance firms, pension funds, and NBFCs act as intermediaries between households, who are the lenders, and firms who are borrowers. In the IL&FS case, there are bonds that have not kept to the interest payment schedule and were, thus, classified as below investment-grade by credit rating firms. Once that happened, the exposure to such bonds held by mutual funds came to light. Next came the exposure of NBFCs to these bonds.

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Plenty of bad news but markets are up. Should you worry?

RRR exit, hmmm. Brexit, meh. Shrugging off plenty of bad news, the Sensex hit an 11-month high this week. What’s going on? The story for India is the thickening of the retail equity pipeline, not directly in stocks, but through institutions such as pension funds and mutual funds. Sustained flows of retail money is coming in. And it is coming in a staggered manner. Indian household money has traditionally been in real assets such as gold and real estate, in bank fixed deposits (FDs) and to some extent in life insurance policies. The organised sector contributed to their provident fund, which again went into bonds and other fixed return paper. Think about the change in our own investing behaviour—we swore by FDs and Life Insurance Corporation of India policies, but are now die-hard SIPpers (investors into systematic investment plans of mutual funds). What changed?

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EPF tax rolls back for now. Good time to rethink pension reform

Finance minister Arun Jaitley announced in the Lok Sabha on Tuesday that he will roll back the tax on salaried Middle India’s one true friend—the Employees’ Provident Fund (EPF). The Budget had proposed to tax 60% of the EPF corpus on retirement, leaving 40% tax-free. But if the 60% was invested in an annuity, it would remain tax-free; the tax will be paid on the income the annuity generates. The National Pension System (NPS) has retained tax-free status for 40% of its corpus. You can take 60% of your NPS corpus as a lump sum at age 60 and 40% must go to buy an annuity. Of the total NPS corpus, 40% will now be tax-free and you will pay slab rate tax on 20% of the corpus. If your NPS corpus is Rs.100, then your tax is on Rs.20. The annuity income is taxed at slab rate.

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The EPF tax in Budget 2016 will cost you, but not as much as you thought

The controversy around Employees’ Provident Fund (EPF) began two weeks back, and not on Monday, when it was announced that the withdrawal rules will change. With effect from 10 February, a labour ministry amendment has capped what you can withdraw from your EPF corpus before you retire. Before 10 February, you could have withdrawn your entire EPF corpus if unemployed for more than two months. Before EPF portability, each time you moved jobs and got a new EPF number, you could clean out your PF money from the previous employer. The new rules allow you to withdraw your contribution and the interest on it before retirement, but the employer’s contribution is locked in till age 58. On Saturday last week, I accidently stepped into an ongoing conversation about the change in EPF rules on Twitter. Read the debate on my twitter handle @monikahalan on 28 February 2016 around this. People were angry at getting locked into the product and wanted greater flexibility.

 

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Taxing the rich in a poor country

The much anticipated inheritance tax gave the country a miss one more year. And neither did the dreaded capital gains tax raise its head. The big changes for your money are at the fringes— both at the lower and the upper ends. The very rich in a very poor country will pay for their affluence. People earning more than Rs.1 crore will now see the surcharge on tax go up to 15% from 12% in the current financial year. For incomes over Rs.1.1 crore, the marginal rate of tax is now 35.54%. The dreaded dividend distribution tax (DDT) sees a return. For an annual dividend income ofRs.10 lakh or more, the investor will pay a DDT of 10%. This means that at an assumed dividend of 2-3%, an investor will need to have a portfolio of Rs.3.5-4 crore, to begin paying this tax. This is in addition to the 15% tax already applicable. An additional cess on vehicles will cost more—1% on small petrol, LPG and CNG cars; 2.5% on diesel cars of certain capacity; and 4% on other higher engine capacity vehicles and SUVs. Get ready to pay tax at the point of purchase for luxury cars. Such cars costing more than Rs.10 lakh will cost you 1% of the car value. Buying stuff in cash that costs more than Rs.2 lakh? Pay 1% of your spend as tax at the point of sale. Worry if this cash was out of the tax net, for the government looks serious in identifying who you are.

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