Since this new tax modifications the attractiveness of EPF past the desired restrict, allow us to take a look at whom it impacts when it comes to wage stage and what are the comparable alternate options. Since contribution to EPF works as a proportion of primary wage, the brink for taxation involves Rs 2.5 lakh divided by 12% i.e. primary wage of Rs 20.8 lakh per yr. Since that is solely the fundamental wage, the headline wage can be roughly Rs 41 lakh per yr. Folks incomes larger than this may search for comparable choices for his or her VPF contribution. For EPF, although the brand new taxability is a matter, there’s a matching contribution from the employer. Coming to comparability of choices, the speed of curiosity in 2020-21 was 8.5%, which can be revised downward subsequent yr because the yield ranges of fastened revenue investments out there have eased. Taking a tax charge of 30%, ignoring surcharge and taking cess at 4%, the web of tax return comes to five.8%.
Whereas returns from VPF are enticing, liquidity is a matter. As towards that, open ended mutual funds (MFs) supply liquidity within the type of simple redemptions and good credit score high quality as effectively, offered you choose the suitable fund. There are Authorities Safety primarily based funds, there are funds primarily based on State Authorities papers often known as SDLs (State Growth Loans) and funds with portfolios of AAA oriented PSUs and personal sector firms. Debt MFs supply tax effectivity as effectively, over a holding interval of three years or extra. There’s ‘indexation’ out there for computation of long-term capital positive aspects (LTCG) tax. This indexation is said by the Authorities (Central Board of Direct Taxes) as regards to CPI inflation. Relying on inflation and indexation, the LTCG tax charge of 20% (plus cess) comes down considerably.
The one challenge that will come up in a good-credit-quality debt MF portfolio is rate of interest volatility within the monetary markets. Yield ranges within the secondary market, which is the underlying portfolio, transfer up and down and consequently the NAV of the fund would fluctuate. This volatility in a debt MF may be tackled by way of the next:
- Have an adequately lengthy horizon. Over a protracted horizon, the accrual of the portfolio, which is the curiosity obtained on the bond and different investments within the portfolio, change into robust sufficient to offer stability to your returns;
- Choose maturity roll-down funds. Within the normal open-ended debt funds, there’s a portfolio maturity that’s determined by the fund supervisor, inside the mandate of the fund. The volatility of the fund is influenced by the portfolio maturity. The longer the maturity, larger the volatility. As towards the standard open-ended funds, there are specific open-ended funds the place the said coverage is to let the portfolio maturity roll down. In a bond or different debt instrument, there being an outlined maturity date, the remaining maturity comes down with passage of time. Roll down maturity funds behave in an identical method. The benefit is, the market-related volatility threat comes down progressively, because the residual maturity rolls down.
For comfort of traders, some maturity roll-down funds are as follows:
- Nippon India Nivesh Lakshya Fund is a Authorities Safety oriented fund i.e. greatest credit score out there. As on 31 Jan 2021, 97.6% of the fund corpus is invested in G-Secs and the stability in money equivalents. The fund has a portfolio maturity of roughly 24 years and portfolio YTM of 6.68%. The portfolio yield-to-maturity is the common yield of all of the devices within the portfolio, as on a given date. Given the lengthy portfolio maturity, this fund is appropriate for a protracted funding horizon, say 10 years or 15 years that almost all PF traders have.
- Axis Dynamic Bond Fund has a portfolio maturity of roughly 9 years and portfolio YTM of 6.45%. Its portfolio contains AAA rated company bonds and G-Secs. For a portfolio maturity of 9 years, an funding horizon of 5 to 9 years can be advisable.
- L&T Triple Ace Fund has a portfolio maturity of seven.3 years, portfolio YTM of 6.37% and portfolio contains AAA rated company bonds and G-Secs. This might be good for a horizon of 5 to 7 years.
Conclusion
The SLR of funding stands for security, liquidity and returns. EPF / VPF is secure. Debt MFs can even supply cheap security offered you choose the fund with the suitable portfolio high quality and do the suitable matching of portfolio maturity and funding horizon. Buyers can handle the dangers by investing in roll-down-maturity G-Sec funds (e.g. Nippon Nivesh Lakshya) or AAA oriented roll-down funds (e.g. Axis Dynamic or L&T Triple Ace). To be famous, company bonds are usually not utterly freed from threat, as we have now seen in case of IL&FS and DHFL, which had been rated AAA at one level of time however their credit standing dropped sharply later. Consequently, except a MF is a 100% G-sec fund, a point of credit score threat stays. Nevertheless, open ended debt MFs are extra liquid than EPF/VPF. These impacted by the brand new tax on EPF curiosity can do their very own analysis of the above talked about alternate options when it comes to post-tax returns.
(The author is a company coach (debt markets) and creator.)