Ask Us: On investments

Q. I am 60 years old. I retired from a PSU seven months back and have a kitty in NPS (auto choice). In addition, I have lump sum retirement funds which I have/propose to invest in safe options like SCSS/PMVVY/RBI floating rate bond and MIS, etc. I will have some surplus left after the above. As I have been getting good and safer returns from my NPS account, I do not wish to exit it in full. Is it possible to buy annuity worth 40% of the amount and reinvest balance 60% in NPS with same or different PRAN? What will be tax implication if above route is possible? I have the option of buying annuity directly from my retirement lump sum fund but I wish to avoid that as it will attract GST.

Vivek Raju Saxena

A. If you had applied for continuation of NPS account or deferment of lumpsum withdrawal at least 15 days before your retirement, you could have continued with same PRAN as detailed here:

But you can still open a new account and contribute and also claim tax deduction as is the case with regular NPS. However, make sure you get these points right: one, make sure you have sufficient sources of monthly cash flow through other incomes. Two, your equity allocation should not be high as it is possible that you may not keep this invested for too long. Three, from our understanding, if you invest this afresh, then you will need to commute another 40% again with an annuity, when you withdraw.

And the annuity income will be taxable. Four, you will have a lock in of 3 years. Please check these points before you invest. Finally, I don’t think paying tax should come in the way of buying some immediate annuity plans as long as the plan is a good one.

Also, the other option is for you to go with low-risk debt funds in categories such as corporate bond funds or banking & PSU debt funds if you want the money to grow and yet have liquidity.

If you need income, then you can use ultra-short debt funds in addition to the above and do a systematic withdrawal plan.

Q. I am doing investments of around ₹1.2 lakh per year consisting of ₹70,000 in LIC and ₹50,000 in HDFC tax saving scheme. My monthly income is ₹65,000. My queries are as follows: Recently a friend told me that if we do investments that are non-taxable even then we need to pay tax on the interest on the total sum at time of maturity. Is this true? For example, if I am investing ₹50,000 in HDFC policy (tax-free) for 5 years. Maturity of policy date is 10 years and I get ₹9 lakh after 10 years. So, will this ₹9 lakh be added to my taxable income for that year and I have to pay tax on it again? Second, I want to buy a house 2 years from now. How should I do my investments so that I have at least ₹10 lakh in hand in 2 years.

Harshika Chaudhary

A. We are assuming both the policies you are mentioning are money back policies – either ULIPs or traditional ones. The amount you receive from such policies are tax free under Section 10(10D) of the Income Tax Act, 1961. However, in case you are invested in tax-saving mutual fund (called ELSS), then the profit will be taxed as capital gain at 10%. If you are young, our advice would be that you don’t get into too many money-back policies.

Their returns are abysmal. You are better off going with tax-saving mutual funds and invest other savings (outside of tax saving) in equity index funds or ETFs.

On saving withing 2 years – the time frame is not sufficient to take any risks. Hence, it is best to invest in bank FDs – perhaps with small finance banks that give higher interest or go with short duration debt funds. Assuming you do get moderate return of 7% you will need to invest ₹40,000 per month at least to get there.

Q. I am 21 and I have some savings. Where can I invest it? Is post office a good option? What are the different savings schemes available at post office? What returns can be expected after the end of 4 to 5 years.

Bharathi JK

A. Post office recurring and time deposits offer anywhere between 5.5% (1 year) to 6.7% (for 5 years) and this is not attractive for a young investor like you.

You can start with PPF, which you can invest through major banks as well, if you are looking at long term investment. PPF offers 7.1% at present that this will keep changing when rates change. At present you can expect it to go up but it may also come down in future.

It is still among the better returning government scheme options. It also gives you tax deduction, in case you are in a job and have income that is taxable. If you will take some risks and willing to wait for minimum of 7 years, then there are also mutual funds that you can look at. Doing a SIP in a Nifty based index equity fund is a good way to start. For shorter durations like 2-3 years, use short term debt funds.

Q. In a response to an earlier query that appeared in this column, it was stated that there is some risk in placing FDs with small finance banks. As deposits with such banks are covered by insurance up to ₹5 lakh what other risk is expected.

T K Kannan

A. There is safety in the form of insurance for up to ₹5 lakh as you have pointed out. But as a class of banks, small finance banks can be riskier than traditional banks given that their mandate is to lend primarily to priority sectors. And such sectors are fraught with risk of default. Hence their risk profile is typically higher than regular FDs. But as long as you are investing under ₹5 lakh in such banks and have sufficient corpus in large systemically important banks (SBI, HDFC Bank, ICICI Bank) then it is indeed fine.

(The financial adviser is co-founder,

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Printable version | Aug 16, 2022 4:03:18 pm |