THE FUND : IS IT STILL ATTRACTIVE
1. The AFPP/DSOP is one of the most preferred savings avenue among service personnel.
The CDA deducts the monthly subscription and uploads the DSOP statement at the end of the
year. To help understand method of calculation of the interest accrued, calculation sheet on
EXCEL with formula is as under :-
1/
A B C D E F
2 Opening Bal ₹ 6,41,294
3 Month Interest Subscription Withdrawal Closing Balance = C2+D4
4 01 Apr 2019 8% ₹ 20,000 ₹0 ₹ 6,61,294
5 01 May 2019 8% ₹ 20,000 ₹0 ₹ 6,81,294
6 01 Jun 2019 8% ₹ 20,000 ₹0 ₹ 7,01,294
7 01Jul 2019 7.90% ₹ 50,000 ₹0 ₹ 7,51,294
8 01 Aug 2019 7.90% ₹ 50,000 ₹0 ₹ 8,01,294
9 01 Sep 2019 7.90% ₹ 50,000 ₹0 ₹ 8,51,294
10 01 Oct 2019 7.90% ₹ 50,000 ₹0 ₹ 9,01,294
11 01 Nov 2019 7.90% ₹ 50,000 ₹0 ₹ 9,51,294
12 01 Dec 2019 7.90% ₹ 50,000 ₹0 ₹ 10,01,294
13 01 Jan 2020 7.90% ₹ 50,000 ₹0 ₹ 10,51,294
14 01 Feb 2020 7.90% ₹ 50,000 ₹0 ₹ 11,01,294
15 01 Mar 2020 7.90% ₹ 20,000 ₹0 ₹ 11,21,294
=SUM(F4:F15)
16 TOTAL ₹ 4,80,000 ₹1,05,75,528
17 Average Weighted Rate of Interest Earned 7.92% =SUMPRODUCT(C4:C15,F4:F15)/F16
18 Interest earned in the year ₹ 69,792 =C17*F16/12
=C2+D16+D18
19 Closing Balance ₹ 11,91,086
2. Budget 2021 has proposed to tax the interest on contribution in Provident Fund beyond
Rs 2,50,000. Presently, the interest earned on AFPP/DSOP for any amount of contribution is
exempt from Income Tax thus making it EEE (Exempt u/s 80C while Investing, Exempt on the
Interest Earned and Exempt on Withdrawal). A hypothetical case is explained as under:-
(a) Opening Balance/Contributed Amount - Rs 11,91,086.
(b) Monthly contribution(Assumed) - Rs 30,000.
(c) Hence yearly contribution - Rs 3,60,000.
(d) Present Interest @ 7.1 %.
(i) On Rs 11,91,086 - Rs 84,567.
(ii) On Rs 3,60,000 - Rs 25,560.
(e) Tax Liability from 01 Apr 2021.
(i) On Rs 11,91,086 - Rs 84,567 (Nil).
(ii) On Rs 3,60,000 :-
(aa) Rs 2,50,000 @ 7.1% - Rs 17,750 (Nil).
(ab) Rs 1,10,000 @ 7.1% - Rs 7,810
(Assuming for 30% slab with Cess - Tax@34%).
(ac) Hence, Interest Earned on Additional Investment is Rs 5,154.
(iii) Hence, additional savings of Rs 1,10,000 has earned 4.68% Interest,
post tax. The Consumer Price Index (CPI) Inflation for Jan 2021 is 4.06%,
meaning the returns is just able to beat inflation. However, at CPI > 4.68%, as
was seen during Oct-Dec 2020, there would be devaluation/erosion of capital.
3. The introduction of the aforesaid tax has made the subscribers to rethink the traditional
investment avenues being followed. Being a systemic risk, diversification is the only viable
solution to earn better returns. Hence, a few recommended options/way-forward are given as
under:-
(a) Do not withdraw from AFPP/DSOP. The accumulated money is earning 7.1%
of ‘Tax-Free’ returns.
(b) Tax Free Vs Taxable Income. It is recommended to reduce AFPP/DSOP to
Rs 21,000 pm hence amounting to Rs 2,52,000 per annum. This shall ensure that the
contribution gets ‘Tax Free’ status. However, for conservative investors who feel safe in
DSOP/AFPP fund earning post tax 4.68% of assured returns (at the present rates), they
can continue to subscribe to higher deductions.
(c) Additional PPF Account. Diversify your debt savings by opening PPF account in
name of spouse, if she has her income. The additional contribution shall have tax benefit
u/s 80 C of Income Tax Act 1961.
(d) RBI Taxable Bonds. RBI Taxable Bonds have been introduced by RBI in
2020 with a seven years lock-in period. It has a floating rate clause of additional
0.35% above the prevalent National Savings Certificate (NSC) interest rates. Since
the NSC is presently earning 6.80%, hence RBI Taxable bond is earning 7.15% taxable
returns, payable half yearly.
(e) Mutual Funds(MF) Investments. All Mutual Funds have Direct and Regular
Plans. Invest in ‘Direct Plans-Growth Option’ to optimise returns. A Fund not having
Direct in its name, is a Regular Plan, having a higher Expense Ratio. It is recommended
to use Mutual Fund Utilities(MFU) Platform for operating the Mutual Fund Investments
(https://www.mfuonline.com/onlineMfuPage?reqPageType=eCAN). MFU is a Shared
Services of the Mutual Fund industry under the aegis of Association of Mutual Funds in
India (AMFI) and all Asset Management Companies have to mandatorily provide its
services under one umbrella. Mutual Funds can primarily be classified as Debt and
Equity Funds. A brief about both investment classes is given in succeeding paras.
(f) Debt Mutual Fund. Debt MF invest minimum 65% of its money in debt
instruments of the Govt, Banks and companies. The various types of debt Mutual
Funds as given by Securities and Exchange Board of India (SEBI) is explained by AMFI
(https://www.amfiindia.com/investor-corner/knowledge-center/debt-fund.html).
However, considering the likely rise in Non-Performing Assets of financial institutions and
the interest rate risk due to the Repo being at all time low (presently at 4%), it is
recommended to restrict to PSU & Banking Fund only. In case of rate reversal i.e. the
interest rate moving up, stay invested for the whole interest rate cycle i.e have long
term view of 7-10 years to avoid capital losses.
(g) Equity Mutual Funds. Equity MF invest minimum 65% of its corpus in Shares
from the universe of around 5,000 listed stocks. (https://www.amfiindia.com/investor-
corner/knowledge-center/equityfunds.html). For equity investments, it is
recommended to invest in Index funds. Index Funds are passive funds which invest their
corpus in the underlying index. If Rs 100 is invested in NIFTY 50 Index Fund, the MF has
to but the shares of 50 companies of the NIFTY 50 Index as per their weight in the Index.
Hence, the money has got deployed in a diversified portfolio negating any concentration
risk. Historically, passive funds have out-performed active funds giving steady returns
due to lower expense ratio and no bias of the Fund Manager. The MF scheme offering
lowest expense ratio (as low as 0.05%) is recommended to be chosen. There shall be
negligible difference in returns between schemes of various Fund houses since they
invest in the underlying index. It is also recommended to invest in plain vanilla Index
Funds of NIFTY 50, NIFTY Next 50/SENSEX and to avoid Thematic Funds due to its
cyclic nature.
(h) Gold. Gold can be purchased in form of physical Gold, Sovereign Gold Bonds of
RBI, Digital gold offered by Minerals and Metals Trading Corporation through the
Digital payment Applications and Gold Mutual Funds. The sovereign Gold Bond of
RBI offers 2.5% pa taxable returns and Market Value at the end of the eight years
period. The Capital Gains is tax free. Depending on the preference of the investor
from the options stated above, it is recommended to invest a proportion of the
investible corpus (5-10%) in gold.
(j) National Pension Scheme (NPS). As we are aware, the Central/State
Government employees post 2004 are covered under the NPS operated by the
Pension Fund Regulatory Development Authority of India
(https://enps.nsdl.com/eNPS/NationalPensionSystem.html). NPS account can be
opened by any individual till 60 years and contribution can be made till 65 yrs. An
additional Tax Exemption of Rs 50,000 tax u/s 80 CCD (1B) is provided over and above
the Rs 1,50,000 u/s 80 C of IT Act 1961. This can be invested in different
combination of Equity & Debt as per choice of the subscriber.
(k) Fixed Deposits. For liquidity requirements, investors can park a small amount in
FD of Banks offering interest rate > 7.15%. However, it may be noted that, ‘Higher the
risk, Higher the Returns’. The principal and interest of the depositor in all commercial
banks upto Rs 5,00,000 is insured by Deposit Insurance and Credit Guarantee
Corporation of India.
(l) Real Estate. Investment in Real Estate requires heavy capital, either self-financed
or through loans. Since this article deals with the avenues related to monthly investment,
hence this sector has not been covered. However, the COVID-19 new normal of work-
from-home, shared work space shall have unprecedented impact on both commercial
and residential real estate sector. Hence, due diligence needs to be exercised before
arriving at any decision.
(m) Direct Equity/Shares. The fact that 63 lakh new demat accounts were
opened during Apr-Oct 2020 and around Rs 60,000 Cr of Equity MF saw outflows
during the same period indicates the increase of retail participants in purchase of
direct stocks. Investing in direct stocks requires patience, long term views and the flair
for tracking the stocks. The same is acquired by regular monitoring of macro and
micro economic factors, tracking its impact on the indices, analysing the financial
results, its implications and finally derive at the decision whether to purchase/sell a
particular stock. The whole exercise requires not only specific skill-sets but also time
for regular monitoring, many of us would be lacking. The risk reward and the additional
profit per unit of stress needs to be analysed before entering the equity market. Hence, it
is recommended to invest through MF as they have the requisite infrastructure and
wherewithal. Investing requires long term goals and discipline in investments. Hence,
Systematic Investment Plan is recommended rather than ‘Timing the Market’. The
social media flooded with plethora of unsolicited advises/views for earning quick money.
Please resist to fall into such traps. As has been rightly said, the markets are more
psychological and less logical. For astute investors who have invested sizeable
investments in the stock market, it is recommended to evaluate their portfolio returns,
brokerage and taxes paid using XIRR function in excel and take course correction, if any.
(n) Insurance as Investment. All defense personnel are provided Insurance through
Group Insurance Schemes during their service which is extended post retirement, but for
a smaller amount. The Sum Assured is calculated to cater for the ‘Loss of Income’ to
the bereaved family. Hence taking a policy for children/spouse may not be desirous,
since their unforeseen loss may not have any financial bearing. Since the sum assured
and the monetary emoluments payable to the Next of Kin is generally able to
compensate for the financial loss to the family, additional Life Insurance/PLI policies is
not recommended during service years. Ideally, those who plan to take pre-mature
retirement/want a higher insured amount, can plan to take a ‘Term Insurance’ policy to
cater for the unforeseen event. Term insurance has a very low premium and the sum
assured can meet the financial needs of the family, in case of untimely death of the
individual. It does not generate any returns post the expiry of the policy. Insurance and
savings/investment have different aim and hence should not be clubbed. An insurance
done with an aim of investment is always a drag on the returns. The high commission
margins to the agents ensures mis-selling of insurance products as investments leading
to sub-optimal returns.
5. Taxation. As per Income Tax Act 1961, all individuals are required to file their Income Tax
Returns, which is mostly verification of pre-filled data of Tax Deducted at source. Changes due
to any income due to house rent/other sources need to be added and interest on home loan, if
any, need to be deducted. Accordingly, all individuals are required to file ITR 1 (salaried+1
house) or ITR 2 (having more than 1 house). The Budget of 2020 introduced an option for
availing the Old or New Tax Regime depending on the individual’s choice of whether to avail or
forfeit the exemptions respectively. The budget 2021 has kept the Income Tax slabs
unchanged. The taxation in respect of Equity Mutual Fund/Stocks is 10% Long Term Capital
Gains (LTCG) for profit amounting to more than Rs 1 lakh from investments >1 year. In case of
redemption <1 year, Short Term Capital Gains(STCG) of 15% shall be applicable. Hence,
diversification of portfolio by investing in the name of family members and restricting the
redemptions upto Rs 1 lakh of profit can reduce the Income Tax. In case of Debt Mutual Fund,
the capital gains tax for STCG i.e. if redeemed within three years is at the applicable tax slab of
the investor and if redeemed beyond three years, LTCG is 20% with indexation.
4. Conclusion. The COVID-19 has impacted all the world economies due to disruptions.
India, one of the leading emerging economy saw a GDP contraction of 8% in Q2 of FY2021. All
the Central banks including RBI have resultantly increased the currency in circulation and
lowered the interest rates, hence providing liquidity which is key for any economic growth.
Globally, the abundant liquidity is one of the primary reasons for the equity markets to be at
elevated levels. Going forward, the economic revival is the primary KRA of any Government.
Hence, the lower interest rate regime is likely to be present for a longer duration. As an
individual investor, it is important not only to look for ‘Return on Capital, but also, Return of
Capital’. Hence, it is recommended to invest as per goals, risk appetite and into products
keeping ‘Safety of Investment’ as the most important factor. The various avenues discussed
above need due diligence by the investor before finally investing in the product.
