Where should we invest? PDF Print E-mail
Thursday, 03 March 2016 05:43
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Bank deposits taxed, equity isn’t, nor is PPF...

If it wasn’t bad enough that government employees are paid so exorbitantly (see the IIM-A study done for the last pay panel), the budget proposal to tax 60% of the withdrawals from the Employees’ Provident Fund doesn’t seem to apply to the General Provident Fund to which bureaucrats contribute and get the same tax benefits—of no tax being put on the withdrawal of the contribution or the interest earned on it—that common folks do from their EPF accounts right now. And if employer contributions—from the point of view of availing tax benefits—under the  EPFO are to be limited to Rs 1.5 lakh a year as has been proposed in the budget, will this mean that all contributions by the government to the New Pension Scheme (NPS) accounts of babus who joined after 2004 will be added back to their salaries and be taxed? If not, it does seem unfair to single out an already privileged lot of people for preferential treatment. Apart from the obvious iniquity, there is a problem in taxing 60% of the corpus on retirement since you end up eating a substantial part of the contribution by the employee. In a hypothetical example of a Rs 20,000 contribution each month and an 8% interest rate on EPFO, the corpus at the end of 30 years will be Rs 2.9 crore—taxing 60% of this at the top rate of 30% means an effective tax of 18%.

There is, however, an even greater problem, and that has to do with the noodle soup the government has created when it comes to savings schemes available. The EPF, at the moment, gives an 8.8% return and all earnings from it are exempt from tax. The PPF gives similar return of 8.7% and is tax free, but you can only invest Rs 1.5 lakh a year in this. Any amount can be invested in NSCs and the interest rate is a reasonably high 8.5% but the interest is taxable—you can, of course, get a Rs 1.5 lakh deduction on your income as per Section 80C. There is then, the Sukanya Sammriddhi scheme which also has the Section 80C benefit and enjoys all tax exemptions—the investment ceiling here is Rs 1.5 lakh per year per girl child. If that isn’t complicated enough, you pay virtually no tax (except for the small securities tax) if you invest in the markets for over one year. The principle here seems to be that there were no tax deductions given when the investment was made, so there should be no tax on the returns. That’s a sound logic, except if you invest your savings in bank deposits, you don’t get any tax deduction either, but you pay a tax on this. The government wanting to tax the employer contributions of over R1.5 lakh per year is sound—with the caveat that it needs to be applied to bureaucrats too—since that effectively means the benefits are restricted to those earning up to R12 lakh a year, but if the government is going to be creating different rules for different investment avenues, citizens aren’t going to know where to invest.



Last Updated ( Thursday, 03 March 2016 05:56 )

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