Saturday, April 13, 2024

Can NPS Tier 2 be used as a substitute for debt mutual funds?


After the debt mutual fund taxation change from 1st April 2023, many readers have requested us if they’ll use NPS Tier 2 as a substitute—a dialogue. We had beforehand mentioned a associated concept: Can I take advantage of NPS Tier II as a low-cost index fund?

All NPS pension fund managers present portfolio particulars below “statutory disclosures” on their web sites. For instance,

SBI NPS Scheme C Tier II (Company bonds)

  • Common Maturity of Portfolio (in yrs) 4.86
  • Modified Length (in Yrs) 3.65
  • Yield to Maturity (%) (annualised)(at market worth) 7.80

SBI NPS Scheme G Tier II (Govt bonds)

  • Common Maturity of Portfolio (in yrs) 11.36
  • Modified Length (in Yrs) 7.02
  • Yield to Maturity (%) (annualised)(at market worth) 7.24

The Tier II G scheme holds long run bonds and will probably be fairly unstable. The Tier II C scheme holds medium-term bonds and can nonetheless be unstable in comparison with a liquid fund. One shouldn’t use Tier II for short-term targets.

So can I take advantage of NPS tier II as a tax-efficient long-term debt fund?

Nobody is aware of how NPS tier II is taxed. That’s, there is no such thing as a official documentation. Some CAs have opined that this mechanically implies that tier II good points will probably be taxed as per slab as revenue from different sources. So the tax effectivity is just not there.

Earlier, some “pundits” argued that should you put money into the C and G scheme, the returns will probably be taxed as a debt fund. So now that’s once more as per slab!

Some taxpayers fortunately assume the good points are tax-free, and a few don’t even present it in ITR. All this uncertainty is just till Tier II turns into fashionable. Then we can have a transparent tax rule.

We advocate assuming tier II good points will even be taxed as per slab. They’ll then be thought-about a debt fund various for long run targets, offered an NPS Tier I account is already current. Please don’t open an NPS account to get a Tier II account! Nothing particular about each I and II tiers!

Nonetheless, it should be clearly understood that returns are market linked and Tier II has no particular benefit in comparison with a gilt fund or a company bond fund. Due to this fact don’t advocate utilizing Tier II as a substitute for debt mutual funds.

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