I missed the live budget speech and spent the entire morning in the woods of IIT, Madras with my son creating ripples in a pond and searching for insects. When I checked the budget highlights I found nothing spectacular from a personal finance perspective (the only one I can understand). Since no bad news is good news, this is something to cheer about.
I can’t find anything about mutual funds. Perhaps there is some reference to them in the annexures of the official document.
More clarity is required wrt tax-free infra bonds. Increase in 80D deduction limits means nothing. One must have the money to afford the higher premium.
Now let us get to the National Pension Scheme. Amused to see a few mentions in the speech. This is what the finance bill says:
- The limit on deduction on account of contribution to a Pension Fund and the New Pension Scheme is proposed to be increased from Rs 1 lakh to Rs 1 .5 lakh.
- To provide social safety net and the facility of pension to individuals, an additional deduction of Rs 50,000 is proposed to be provided for contribution to the New Pension Scheme under Section 80CCD. This will enable India to become a pensioned society instead of a pensionless society
1) NPS tax deduction limit is Rs. 1.5 Lakh
I thought it was increased last budget itself! One should not opt for NPS because of this feature alone. Thankfully ELSS funds still exist. So PPF+ ELSS funds is all that one needs.
2) Additional deduction of Rs. 50,000
This means investors can now get a maximum tax benefit of Rs. 2 Lakhs. Thanks to Krishnan Muthusubramanian of AIFW for pointing this out. This is great news for people like me whose contributions already exceed Rs. 1.5 Lakh. But do not take this seriously and invest in NPS (see below).
3) Govt wants to offer a choice between EPF and NPS
Even if this materializes (a BIG if), do not opt for NPS in a hurry.
(a) If you intend to retire early stay away from NPS. It will lock your money in an annuity: 80% will be annuitized before age 60 and 40% afterward. It is a waste of corpus. Stick to EPF.
(b) EPF has finally been streamlined with online access, integration across jobs etc. NPS is a baby. It has not matured as a product and transferring accounts is a pain.
(c) If you contribute to NPS and employer contributes to EPF, it would be a mess. If you employer also contributes for NPS, opt for it only if you will not change jobs. Else dont.
(d) EPF proceeds is tax-free. NPS is not. If an option is provided, NPS also should be made tax-free. Let wait for clarity. Fingers crossed.
(e) NPS will be volatile. Use EPF for your debt portfolio and use equity mutual funds or stocks instead of using the equity option in NPS. Diversified mutual funds will be better managed.
Verdict: Stay away from NPS. Use EPF +PFF for debt and ELSS+ diversified mutual funds +stocks (if you are up to it) for retirement.
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