By Sreenivasulu Reddy
While traditional investment vehicles such as fixed deposits and provident funds may offer a sense of security, they often fall short in terms of tax efficiency and long-term growth potential. The tax implications associated with contributions to these accounts can erode the benefits they provide. For example, interest on an employee’s PF contribution exceeding Rs 2.5 lakh and the employer’s contribution over Rs 7.5 lakh, along with the interest on the excess, are taxable.
Individuals must rethink and transform their retirement strategies. Embracing innovative investment avenues like the National Pension Scheme (NPS) could enhance the potential for higher returns.
Build a nest egg with NPS
Contribution to the National Pension Scheme (NPS) provides retirement security and tax benefits. Under the old tax regime, employees’ contributions up to INR 1.5 lakh (including Section 80C) are tax-deductible, with an additional deduction of up to Rs 50,000. Employers’ contributions up to 10% of salary (capped at Rs 7.5 lakh) are also eligible for deduction.
For taxpayers choosing the new tax regime, they can get tax deductions of 14% of the employer’s contribution to NPS. However, no deductions are available for employees’ contributions.
Upon maturity, 60% of the corpus can be withdrawn tax-free, while the remaining 40% must be used to purchase a taxable annuity.
Look at tax efficiency
Let us understand the impact of new age investments on returns and taxation with an example. If we consider an investment of Rs 1 lakh in a fixed deposit (FD) versus equity-oriented mutual funds for 10 years, the approximate income generated for the individual could be Rs 66,540 from the FD (assuming compounded interest rate of 7% and tax at 31.2% upon maturity) compared to Rs 1.99 lakh from mutual funds (assuming an annual compounded growth rate of 12% and tax at 13% upon redemption).
Long-term capital gains, typically applied to assets held for over a year, often enjoy lower tax rates compared to short-term gains. For example, listed equity shares and equity-oriented mutual funds held over 12 months will attract Long-term capital gains tax at 12.5% for gains exceeding Rs 1.25 lakh annually.
The holding period required for long-term classification of immovable properties has been shortened from 36 months to 24 months. This change enables investors to access the lower long-term capital gains tax rate of 12.5% sooner, and there are exemptions available for reinvestment, subject to specific conditions.
Individuals need to remain proactive and adaptable in their approach to retirement planning. By prioritising tax efficiency and staying informed about new investment opportunities, they can pave the way for a secure and prosperous financial future.
(The writer is tax partner, EY India. Inputs from Trupthi KS, director, Tax, EY India)
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