Hemant Contractor, Chairman, PFRDA is of the opinion that due to the LTCG tax, the attractiveness of NPS Tier-II account will be impacted
14-Feb-2018 •Kumar Shankar Roy
Your investments in NPS Tier-II account will see impact due to the Long Term Capital Gain (LTCG) tax proposed by Finance Minister Arun Jaitley in Budget 2018.
NPS Tier-II account is a voluntary savings facility. The applicant in this account is free to withdraw his/her savings from this account whenever he/she wishes. Unlike Tier-I account, Tier-II is a not a retirement account and the applicant can't claim any tax benefits against contributions to this account.
Speaking on the sidelines of the 11th ICC Mutual Fund Summit 2018 held in Kolkata today, PFRDA chairman Hemant Contractor said: "LTCG is applicable on both equity mutual funds and equity shares. Earlier, we used to invest largely through mutual funds and that has come down. There is more of direct investing. But this (LTCG tax) will affect us. However, the impact will be limited since we do not trade in securities. Just to clarify that the tax impact of LTCG will be on Tier-II account of NPS, and not on Tier-I account."
As per PFRDA Dec 17 pension bulletin, the number of Tier-II account subscribers have gone up by 40.36 per cent at the end of the third quarter which ended on 30th December 2017 from the start of FY18. The contribution received under Tier II as of December, 2017 was Rs 513.8 crore against the contribution of Rs 481.9 crore as of November, 2017 i.e. by 6.62 per cent during the same period.
When asked about the extent of LTCG tax impact, the PFRDA chairman said: "The total equity investment in our portfolio is about 14 per cent. Those which are getting impacted will be 10 per cent."
Asked about whether PFRDA is making any representation to the government to shield the investors from LTCG tax impact, Contractor said: "I am sure the government would have deliberated on the matter a lot before announcing the decision. We will see if it is going to make a major impact. We are actually yet to do a proper assessment of how much it will impacts us."
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The Tier-II account is open only to those who already have a live Tier-I account. Tier-II operates more or less like a mutual fund, meaning there is no lock-in till retirement and money can be withdrawn any time. The interesting thing about Tier-II is that the debt plans under it make an excellent alternative to bank fixed deposits because the returns are higher, but the liquidity is almost as good as a savings account.
The debt plans of NPS Tier II are particularly attractive in comparison to other alternatives for debt investing. For your short-term needs, NPS Tier-II has lower costs and better returns. But due to the LTCG tax, the attractiveness of NPS Tier-II account will be reduced.
The PFRDA recently had issued guidelines on deferment of lump sum and annuity and continuation of Tier-II accounts under National Pension System (NPS), to provide more clarity and better understanding of various provisions of deferment and continuation of Tier-II accounts as per regulations and operational guidelines.