The Wealth Architects

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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

The 40% Problem When You Invest In National Pension (NPS)


Many people are attracted towards NPS (National Pension System) primarily for one reason... EXTRA TAX SAVINGS.

Firstly, you can invest an 'additional' amount — over and above the Rs.1.50 lakhs limit u/s 80C — in the NPS and claim extra tax deduction of up to a sum of Rs.50,000 per year; giving you a total deduction of Rs.2 lakhs.

Secondly, your employer can contribute up to 10% of your salary (Basic + DA) in the NPS. This contribution from the employer is NOT INCLUDED in your taxable income for the year.

This, double tax savings bonanza, is quite tempting indeed. More importantly, this tax incentive is specific to NPS only, and not available for any other investment/income.

Plus, of course, you don't have to worry about whether your savings will last your lifetime or not. There's the comfort of guaranteed, safe and assured income after retirement till the very end of your (or even your spouse's) life. You can sleep peacefully, knowing that you will never run out of money.

However, there's one major issue that has not received people's due and adequate attention.

And that could turn out to be a serious problem post-retirement:

As you would be aware, on retirement you are ALLOWED to WITHDRAW maximum 60% of the accumulated corpus. The balance 40% will be LOCKED-IN in an Annuity Plan FOREVER.

It is this 40% that requires a deeper analysis.

Let's take a simple example:

Suppose, you invest Rs.50,000 additional amount every year in the NPS for tax-saving purposes. There is no employer's contribution.

Time till retirement: 20 years
Average return during accumulation: 10% p.a.
Annuity rate of return: 6% p.a.

If that be so, you would have invested Rs.10 lakhs over 20 years. The accumulated corpus after 20 years would roughly be around Rs.30 lakhs. Of this,
(a) you could withdraw 60% i.e. Rs.18 lakhs (TAX-FREE) and
(b) the balance 40% i.e. Rs.12 lakhs will compulsorily be invested in an Annuity Plan, which will give you an income of around Rs.72,000 p.a. (TAXABLE).

1st problem: Merely tax deferment
Effectively speaking, you saved tax on Rs.50,000. But now you will have to pay tax on Rs.72,000. Assuming, your tax bracket remains the same, you would be worse off by investing in the NPS.

Instead, if you saved this Rs.50,000 in say hybrid funds, you will not get any tax benefit now. But, your withdrawals would attract very little or no tax at all, due to the indexation benefit on the long-term capital gains.

So, the question you need to answer is:
Would you like to
a. Save Tax Now (in NPS) and Pay Tax Later (in Annuity)
b. Pay Tax Now (on a smaller amount) and Save Tax Later (on a bigger amount)?

2nd problem: Low Returns
Typically, the rate of return in an Annuity Plan is quite fact, lower than even the prevailing bank FD rates.

Whereas debt funds will, in all probability, deliver somewhat better returns than the bank FD rates.

So, even on a pre-tax basis, there is a strong likelihood of earning below-par returns FOREVER if you take the NPS-Annuity route. And, if you account for the annuity pension's tax inefficiency, the gap increases further.

Earning such low returns, year after year for decades, is most definitely a serious issue.

Besides, Rs.72,000 p.a. means just Rs.6000 per month. This, 20-30 years later, won't buy you even a day's groceries. So NPS alone cannot be the answer to your Retirement Planning. You have to think of alternatives too.

3rd problem: Fixed return forever
The rate of return, applicable at the time of buying the annuity, will not change throughout the lifetime. You (your spouse) will receive the SAME AMOUNT year after year for probably decades.

Therefore, you will NOT get the benefit of any increase in the interest rates thereafter.

Of course, you are also protected against the risk of falling interest rates.

If the rates are at historically high levels, maybe it's fine if the returns are fixed forever. But, if the interest rates are low (as at present), this would be a serious issue.

4th problem: Zero Liquidity
You have NO ACCESS whatsoever to this Rs.12 lakhs. Annuity plans do not allow premature withdrawal at all. (Depending on the type of annuity plan you choose, there would either be no return of principal amount, or your nominee will be returned the principal amount after your death.)

If you retire at say 60 and live till 80-85, you have around 20-25 years of post-retirement period. This is too long a time period. Anything can happen in these 2-3 decades. There could be any number of reasons when you would wish you could withdraw at least some amount.

Maybe you need to finance your children’s education.
Maybe you have a critical illness in the family.
Maybe you move to your hometown and have to buy a house.
Maybe you need capital to start a business post-retirement.
Maybe you have settled abroad and would like to shift all your investments out of India.

You cannot depend on the Annuity Plan to bail you out in these difficult circumstances. It will not give you even a SINGLE rupee out of YOUR corpus.

This loss of access to a fairly large part of the capital is another issue, which has not been given deep thought.

And, if we add employers' contribution to this, the problem becomes enormous.

Say, in addition to your Rs.50,000 additional investment, the employer too contributes Rs.50,000 to the NPS. In which case, the amount locked-in in the Annuity would be around Rs.24 lakhs. And, while you save tax on Rs.1 lakh now, post-retirement you will have to pay tax on around Rs.1.44 lakhs.

The more the investment, the bigger the problem.

Don't be lured by the additional tax saving offered by the National Pension System. In fact, it's not tax saving, it's merely postponing the tax liability (unlike say EPF, which is a genuine tax saving).

Don't be lured by a lifetime of assured income offered by the Annuity Plan. The post-tax returns will be much below par.

And, as discussed, NPS alone would be totally inadequate. You would need other options too for a comfortable and stress-free retirement. If that be so, why even think of NPS, given its multiple problems?

You can do a much better job yourself, without any serious efforts or requiring any serious financial knowledge.

Think about it. Seriously.

This is How You Will NOT Lose Money in The Stock Market


Recently, there has been a sharp surge in the 'new' equity investors. However, still more than 90% of the Indians don't invest in the stock market. Reason? FEAR OF LOSS.

I invest in equity. Does it mean that I am okay with losing money? No, definitely not!

On the contrary, like everyone else, I too HATE losing money... but with a difference.

I hate losing money in low-return and tax-inefficient investments like Fixed Deposits.
I hate losing money in sub-standard products such as Insurance Policies and Annuities.
I hate losing money in dubious schemes that (falsely) promise to pay high returns.

Therefore, I invest in equities where I can earn superior — in fact, far superior 
— returns.

Of course, equities are volatile. Forget about returns. There is a "so-called risk" of even losing your CAPITAL. Many investors have indeed become paupers at the stock exchange.

The risk is NOT in the stock markets. The risk is with the investors.

Say I give you a Mercedes or AUDI or BMW to drive. If (a) you don't know how to drive and/or (b) you don't follow the traffic rules, you will surely crash even the best of the cars. The risk is in YOU, not the CAR.

Likewise, I tell you the best Mutual Funds or Stocks to buy. If (a) you don't know how to invest and/or (b) you don't follow the investment rules, you will lose money even in the best of the funds/stocks. The risk is in YOU, not the FUNDS/STOCKS.

However, I know that most of you would be somewhat reluctant to put in the effort required to become financially literate, or be bothered with multiple investment rules.

Like a tip in the stock market, you want an easy and instant solution.

Thankfully, there's one:

Without much further ado, let me share with you the simplest 
— and the easiest — TRICK of making tons of money in equities, with practically no chance of losing your investment.

First: Hire a good driver. In other words, give your money to the mutual fund manager.

Second: Along with Money, invest TIME too. In other words, invest your money in equities for 10-15 years.

Do this and
(a) not only the probability of you making a loss will drop to almost ZERO,
(b) but you could also end up making really MASSIVE gains.

I am not saying so. The numbers say so. The data analysis reveals this historical FACT.

I did some detailed number crunching on the Nifty 50 Index since its birth in July 1990 till Mar 2021 i.e. a long period of 30+ years.

a) Suppose I did a SIP of Rs.1000 p.m. for 5 years (i.e. 60 months) starting on any given day (i.e. around 6200+ possible start dates). What was the value of my investment after 5 years?
Here's what the data revealed:
Amount invested: Rs.60,000

If I was very lucky
: My investment value after 5 years would have been Rs.1,74,000 i.e. more than 37% annualized returns.

If I was terribly unlucky
: After 5 years my investment would be down to Rs.45,450 i.e. a loss of around 11.50%.

Average Value after 5 years
: Rs.81,500 i.e. 11.6% returns

No. of times money lost
: 837 out of 6200 i.e. 13.4% chances of losing money

b) Suppose I did a SIP of Rs.1000 p.m. for 10 years (i.e. 120 months) starting on any given day (i.e. around 5000+ possible start dates). What was the value of my investment after 10 years?
Here's what the data revealed:
Amount invested: Rs.1,20,000

If I was very lucky
: My investment value after 10 years would have been Rs.5,08,000 i.e. more than 24% annualized returns

If I was terribly unlucky
: After 10 years my investment would be down to Rs.1,03,000 i.e. a loss of mere 3%

Average Value after 10 years
: Rs.2,30,000 i.e. 11.8% returns

No. of times money lost
: 218 out of 5000 i.e. 4.3% chances of losing money

So, what lessons can we learn from such a long history of the Indian stock markets?
a. Be it the best of the times or the worst, if you stay invested in the market for 10 years or more, there is very little chance that you will lose money (and even if you do, it will be too small to bother you).

b. Typically, you can expect around 12% p.a. returns. This is far better than all other investment options. (Plus, the icing on the cake: Much lower tax liability as compared to most of the other investment options.)

c. Here, I have taken Nifty 50 as an example, which comprises the top 50 companies. Whereas mid-cap and small-cap companies have the potential to deliver even better returns. So, build a well-balanced and diversified portfolio, and you can expect to improve the returns to around 15% or more.

By the way:
Some people would definitely feel... Oh, 10 years! I have to wait for 10 YEARS? They believe that Stock Market is a place where you can double your money in quick time.

Investing for 10+ years is no big deal.

You are anyway doing it now also (e.g. your insurance policy or the PPF). So why not show the same patience and discipline with equities too!!

Just because it is easy to buy and sell equities, doesn't mean you have to do so.

Don't play with equities as if it is a T20 match. Instead, look at it as a Test Match. From time to time, It may appear dull and boring. But in the end, it is indeed very rewarding.

[Image courtesy:Gerd Altmann from Pixabay]

Exposed: Why So Many Mutual Fund 'New Fund Offers'


Frankly speaking, except for a few, there is absolutely NO NEED for the AMCs (Asset Management Companies) to come out with so many New Fund Offers (NFOs).


Because they already have similar funds among their existing schemes. So, there is nothing really "new" in these New Fund Offers. You can invest in the existing "proven" funds and earn practically speaking the same kind of returns as in these 'new funds'.

Then, why this mad rush on the part of AMCs to launch NFOs every other day?

More importantly, why this mad rush on the part of investors to invest in these NFOs?

The problem is YOU.

YOU are the reason for this needless NFO mania.

You are more than willing to invest in a scheme whose NAV is Rs.10. But, you will NOT invest in a similar scheme with say NAV of Rs.100.

You believe that Rs.10 NAV is "cheaper" — and hence "better" — than Rs.100 NAV.

Sorry to say, but you are COMPLETELY WRONG if you think so.

Yes, the NAV stands for the 'Net Asset Value'.

Yes, the NAV is the price you pay for each unit of a mutual fund scheme.

Yet... when you are buying (or selling) mutual funds, NAV is Irrelevant, Immaterial and Inconsequential.

Want to see HOW?

Investment A
Fund : DSP Nifty 50 Index Fund - Regular Plan - Growth
Amount : Rs.10,000
Date of purchase : Feb 27, 2019
NAV : 10.0071
Units alloted : 999.290 (= 10,000 / 10.0071)

Date of sale : Sept 1, 2021
NAV : 16.0016
Value : Rs.15,990 (= 999.290 * 16.0016)

Profit : Rs.5,990 i.e. 20.54%

Investment B
Fund : HDFC Index Nifty 50 - Regular Plan - Growth
Same Amount : Rs.10,000
Same Date of purchase : Feb 27, 2019
NAV : 97.9633
Units alloted : 102.079 (= 10,000 / 97.9633)

Same Date of sale : Sept 1, 2021
NAV : 157.2039
Value : Rs.16,047 (= 102.079 * 157.2039)

Same Profit : Rs.6,047 i.e.20.71%

NAV of HDFC Index Nifty 50 Fund was almost TEN TIMES more than the DSP Nifty 50 Index Fund.

Yet, both gave practically the same returns.

Not convinced?

Want more proof?

Investment C
Fund : Nippon India Index Fund Nifty Plan - Regular Plan - Growth
Amount : Rs.10,000
Again Same Date of purchase : Feb 27, 2019
NAV : 18.0472
Units alloted : 554.103 (= 10,000 / 18.0472)

Again Same Date of sale : Sept 1, 2021
NAV : 28.4554
Value : Rs.15,767 (= 554.103 * 28.4554)

Again Same Profit : Rs.5,767 i.e. 19.87% 

NAV of Nippon India Index Fund Nifty Plan was nearly double the DSP Nifty 50 Index Fund.

Yet, both gave practically the same returns.

All these funds delivered the SAME RETURNS because their underlying portfolio was exactly the SAME 50 STOCKS that comprise the Nifty Index and in the same proportion. 
[Note: The small difference is due to tracking error and small variation in the expense ratios of the funds.]

In short, NAV is Irrelevant, Immaterial and Inconsequential when you are buying (or selling) your MF units.

Want to see WHY?

Because, unlike the price of onions, potatoes or shares, NAV is not the "price" in that sense. Rather, it is an "average" based on the prices of the underlying stocks in the portfolio and the total corpus of the fund.

And, two average numbers cannot be compared in the same manner as you compare two prices.

For example,
Average of 5, 5, 5, and 5 is 5.
And Average of 10, -2, 4 and 8 is also 5.
Yet, the two underlying series are totally different.

... it is meaningless to say that Rs.10 NAV Fund is cheaper than Rs.100 NAV Fund. It is like saying that Sachin Tendulkar is better than Albert Einstein. The two simply cannot be compared.

... ultimately what matters is the "quality" of the fund; no matter what NAV you invest at or whether it is NEW FUND or a very OLD FUND.

... what is relevant is the "Portfolio" of the Scheme... which DOES NOT EXIST at the time of NFO.
... what is relevant is the "Performance" of the Scheme... which is ABSENT in an NFO.
... what is relevant is the "PE & Expense Ratios" of the Scheme... which are UNKNOWN in an NFO   
... what is relevant is the "Corpus" of the Scheme... which is UNCERTAIN in an NFO.
... what is relevant is the "Fund Manager" of the Scheme.
... what is relevant is the "Asset Management Company" of the Scheme.

... these are the parameters that you must focus on when choosing which fund to invest in or redeem; and forget the Net Asset Value or the Age of the scheme.

... if anyone sells you a New Fund Offer saying that it is cheaper at Rs.10 NAV, he is MOST DEFINITELY cheating you. Beware of such people trying to make a fool of you.

Last, but not the least...
Whatever equity fund it may be, lump-sum investment is (almost) never desirable. By investing a large amount on a one-time basis in an NFO, you are forgoing one of the best tools to minimize the high volatility risk in equity i.e. SIP (Systematic Investment Plan).

So, even if it may be the best of the best fund offer, the most logical thing to do is to skip the NFO; and start a SIP once the scheme is open for subscription.

[Image courtesy: Free-Photos from Pixabay]

Lifetime High Markets. Steep Valuations. Is it risky to invest in equity now?

Every other day the Sensex and Nifty are creating new highs. Undoubtedly, there is extreme euphoria in the stock markets.

However, the underlying economy is still not out of the woods. So, as stock prices rise, the valuations get more and more stretched.

Given this scenario, the common investor is asking the most logical question... should I sell, wait or buy more?

To arrive at the right answer, let me first tackle the valuation aspect and then present before you a different perspective about the markets.

Actually, this valuation business is becoming confusing day by day.

By traditional standards like P/E and P/B ratios, the stocks are quite expensive as compared to the historical averages. So rationality demands that you should be cautious before investing in mutual funds or stocks.

But many experts say that in the new digital economy, old metrics don't work. So they spin out new jargon for the investors.

This is all BOGUS. (I guess they have forgotten the dot-com boom — when 'eyeballs' was touted as the new metric for the new economy — and the disastrous crash that followed.)

They are trying to confuse and mislead you. Well, they have to. Their bread and butter come from selling equity. If they tell you the truth, how will they sell IPOs of even the loss-making companies? Or make people buy stocks? Or incite them to start SIPs in mutual funds?

It has become a passing the parcel game. Because there is a buyer, you can sell even a very expensive stock at still higher prices. I wonder what will happen when the music stops.

Because, the fact of the matter is that one and only one metric matters - CASH OR PROFIT (and by this I mean genuine profits, not the cooked-up books of accounts.)

If someone tells you that profits don't matter, well don't believe him.

Because nothing else, except cash or profit, is going to bring food to your table.
Because nothing else, except cash or profit, is going to send your kids to school/college.
Because nothing else, except cash or profit, is going to make your retirement comfortable.

Because nothing else, except cash or profit, is going to enable companies to grow on a sustainable basis. (How long can they keep burning Other Peoples Money viz. banks, venture capital funds, angel investors, etc.!!!)

So there should be no doubt in anyone's mind that at present the VALUATIONS ARE EXPENSIVE.

So there should be no doubt in anyone's mind that history WILL repeat itself. The law of averages WILL catch up. The markets WILL crash. (No, this is not a prediction. It is just a simple and logical assessment.)

So does that mean that you should sell your stocks and redeem your equity funds?

To answer that question, let me come to the second aspect of this story i.e. the markets.

Nowadays, as you know, there is extreme euphoria in the stock markets.

But, one never knows when this can easily turn into excessive pessimism.

In short, stock markets are like a pendulum. They endlessly move from one end (extreme euphoria) to the other (excessive pessimism). They never stay still at the mean i.e. in line with the fundamentals of the underlying economy. They are almost always IRRATIONAL. They are almost always VOLATILE.

One should appreciate that 'boom and bust cycle' is the inherent nature of the market. You can't wish it away. And you don't need to.

Therefore, as Warren Buffett also says, your investment decisions should not be at the mercy of the markets.

What you need to do is to follow what the spiritual masters preach... look inside.

In other words, SHIFT YOUR FOCUS from the markets to YOURSELF.

First, will you be able to sleep peacefully, if say your portfolio depreciates by say 30-40%? [Important: Note that I have used the word 'depreciates' and not 'loss'. Your portfolio value may be down, but you still haven't LOST money! That will happen only when you SELL.]

Second, do you have enough time to hold on till your portfolio is back into profits? No one knows how long this may take. Maybe a month, six months, one year, five years! In other words you should have the capacity to stay invested for long.

Lastly, is your mutual fund or stock portfolio of high quality? Because, only quality companies will bounce back and make profits for you. Penny stocks, loss-making companies are often doomed for failure and ultimately delisted.

If you analyze yourself on these parameters and take an appropriate call, I can GUARANTEE that you will make money in the equity markets... in fact, good money. [I use the word ‘guarantee’, because Indians seem to be in love with this word.]

Before I sign off, one last point... and an important point.

If you want to make runs, you have to be on the field. You can't do this sitting in the dressing room.

So whether there are dangerous fast bowlers throwing bouncers, or wily spinners with their googlies and doosras, or the conditions are overcast, you have to pad up, wear your protective gear and go out and bat. You can't always wait for the part-time bowlers or sunny conditions. In this regard, you must read this eye-opening article 'Two biggest equity investing myths shattered'.

Yes, you will get hurt. Yes, you will get out many times. But the beauty is that you can go out and bat again and again and again. And, even a few big innings will finally give you a hefty batting average.

In others words, you won't make money 100% of the times. But even a few big gains will be enough to create a hefty bank balance. I don't mind losing 9 out of 10 times, if the 10th one is a multi-bagger. And, trust me, more often than this is what happens. Simply because you can at most lose 100% of your investment, but there is no upside on the gains… which can even be 900% in ten-baggers.

In short, get your strategy right and you will make your lakhs and crores from equity investing... GUARANTEED.

Wow! Mutual Funds To NEVER Give "Dividends" To Investors

Henceforth, no mutual fund scheme shall declare and distribute "dividends" to its unitholders. Thankfully, this has finally been announced by SEBI.

Why thankfully? Why am I so happy by this seemingly investor-unfriendly announcement?

Well, simply because 'dividend' was the wrong word used for the "amount distributed" to the unitholders in the name of 'dividend'. As such, investors were often under the wrong impression that they were getting some "extra" money. This 'false belief' was often misused by some people to fool the investors.

SEBI has, therefore — vide it's circular SEBI/HO/IMD/DF3/CIR/P/2020/194 dated Oct 05'20 — decided that the word 'dividend' would be replaced by the term 'Income Distribution cum Capital Withdrawal (IDCW)'.

Many financial experts had been repeatedly pointing this out, so that the investors were not misled into making wrong choices in the name of 'dividend'. [Read: Growth or Dividend: Mutual fund option perfect for you?]

Let's understand this:

In mutual funds, dividends are not "something extra".

All the profits and gains of a mutual fund scheme — capital appreciation, dividend received from the companies in its portfolio, interest earnings or any other form of income — are added to the total corpus and hence reflected in its Net Asset Value (NAV = Total corpus / No. of units).

Therefore, when any mutual scheme declares a dividend, there is no separate kitty from where the same can be paid. The dividend money comes from the corpus itself. So whenever dividend is paid out, the corpus reduces to the extent of the total dividend amount. Consequently, the NAV too reduces. In other words, pre-dividend NAV = post-dividend NAV + dividend declared.

In shares, the dividend is paid out of the profits, which is separate from the share capital listed and traded on the stock exchange. So, for shares, dividend is additional income apart from the capital gains.

Important: This, in no way, makes mutual funds inferior to shares. It's just that the accounting and process of sharing profits are different. Return-wise there is simply no difference at all.

So now what?

Firstly, the new nomenclature will be 'Income Distribution cum Capital Withdrawal' instead of 'Dividend'. Accordingly,
- Dividend Payout will now be renamed as Payout of Income Distribution cum Capital Withdrawal or Payout - IDCW
- Dividend Reinvestment will now be renamed as Reinvestment of Income Distribution cum Capital Withdrawal or Reinvestment - IDCW
- Dividend Transfer will now be renamed as Transfer of Income Distribution cum Capital Withdrawal or Transfer - IDCW

Secondly, the mutual fund companies will also have to disclose the break-up of the amount distributed i.e. how much is income distribution (appreciation on NAV) and how much is capital distribution (Equalization Reserve).

What exactly is this break-up of the amount distributed?

As mentioned earlier, all gains are reflected in the NAV. However, for accounting purposes and to comply with SEBI guidelines to distribute only the 'realized gains', the total corpus has various components such as Unit Capital, Dividend Equalization Reserve, etc. Therefore, part of your dividend may come from the 'increase in NAV' and part from the 'capital reserves'. 

Hence, this stipulation by SEBI to give the break-up.

This change will not have any impact on the scheme or your wealth creation/distribution. Technically speaking, except for the name change, nothing actually changes as far as the operation of the schemes or the distribution of profits/capital is concerned. So, you can simply ignore these new guidelines... unless the income tax department decides to modify the tax calculations based on how much dividend is coming from Income and how much from Capital.

All you have to note is that (a) 'dividend' in mutual funds is not something extra and (b) it should not influence your investment decision [Read: Shocking mistakes mutual fund investors often commit].

However, those interested in understanding the accounting / mathematics behind this can refer to the AMFI's FAQs on Income Distributed Under Dividend Option of Mutual Fund Schemes.

This new rule is effective from April 1, 2021.

Most Important: Practically for (almost) all cases, it's best to opt for the Growth Option. Dividend (or now IDCW) Option should be avoided. From this perspective also, these new SEBI guidelines should primarily be of academic interest only.

Now Pay Tax On Your Provident Fund Interest Too If...

Till now ALL contributions -- both Mandatory and Voluntary -- to your Provident Fund account enjoyed TAX-FREE interest income (provided you had completed 5 years of service).

Besides, the interest rates on PF have typically been among the highest in the fixed-income schemes offered by the Govt. of India.

Therefore, people have often maximized their investment in their Provident Fund Account, by investing more than the mandatory limit as a Voluntary PF contribution.

This is now history.

As per the Budget 2021 announcements, 'employee' contributions ONLY up to a maximum of Rs.2.50 lakhs per annum would continue to enjoy the tax-free status [Important: See 'Note' later]. And, interest earned on the amount deposited exceeding Rs.2.50 lakhs, will henceforth be taxable.

As you would be aware, 12% of the basic pay + dearness allowance has to be compulsorily invested in your PF Account. In fact, this happens automatically. Every month your employer deducts this amount from your salary and deposits the same to your PF account on your behalf (together with the employers' own contribution).

In other words, your total contribution — i.e. 12% mandatory + VPF or Voluntary Provident Fund, if any — exceeding Rs.20,833 per month (i.e. Rs.2.50 lakhs per annum) will come under the tax net. The employers' contribution is NOT part of this specified limit.

Note: The Rs.2.50 lakhs tax-free limit is for cases where both the employee and employer are contributing to the PF A/c. In cases where ONLY the employee contributes to his/her PF A/c, the tax-free limit would be Rs.5 lakhs, and interest earned on the contribution in excess of Rs.5 lakhs per year would be taxable.

Of course, this budget proposal will impact mainly (a) the high-salaried individuals and (b) those who have been contributing over and above the 12% mandatory limit as Voluntary contribution to earn 'high' and 'tax-free' interest.

How would this work?

Simple! The 'excess' contribution will be maintained as a separate sub-account, just like any other bank fixed deposit account. And, EVERY YEAR, the interest earned on this 'excess' corpus will have to be included in your taxable income and taxed as per your slab rate.

This new taxation is applicable on all excess contributions starting from April 1, 2021.

PO Small Savings Interest Rates: Status Quo For Jan-Mar'21

As you would be aware, the Govt. had announced a massive cut in the interest rates on the various Post Office Small Savings Schemes for the 1st Quarter of FY'20-21 i.e. Apr to Jun'20 [Massive Rate Cut On Post Office Small Savings Schemes].

Thereafter, as expected, it decided to continue with the status quo for the 2nd Quarter i.e. Jul-Sept'20 [Small Savings Interest Rates: Pause After A Massive Cut].

No change in the interest was announced for the 3rd Quarter [Small Savings Interest Rates: No Change For Oct-Dec'20].

And now the Govt. has — 
vide its Office Memorandum F.No.1/4/2019-NS dated 30.12.2020 — declared that the same interest rates will continue for the 4th Quarter too. In other words, there is no revision in the small savings schemes interest rates for the period Jan-Mar'21.

(By now you would surely be aware that since the last few years the interest rates on Small Savings Schemes are reset periodically on a quarterly basis.)

Accordingly, the interest rates on various Post Office Small Savings Schemes for the fourth quarter of the Financial Year 2020-21 — i.e. Jan 1 to Mar 31'21 — are detailed below:

Public Provident Fund (PPF) : 7.1% p.a. [compounded annually]

5-year National Saving Certificate (NSC) : 6.8% p.a. [compounded annually]

Monthly Income Scheme (MIS) : 6.6% p.a. [monthly compounding and paid out]

Senior Citizens Savings Scheme (SCSS) : 7.4% p.a. [quarterly compounding and paid out]

Time Deposits
1-year Deposit : 5.5% p.a.
2-year Deposit : 5.5% p.a.
3-year Deposit : 5.5% p.a.
5-year Deposit : 6.7% p.a.
(All on a quarterly compounding basis)

5-year Recurring Deposit : 5.8% p.a. [compounded quarterly]

Kisan Vikas Patra : 6.9% p.a. [compounded annually] 
(The scheme will double your money in 10 years 4 months)

Sukanya Samriddhi Scheme : 7.6% p.a. [compounded annually]

Savings Deposit : 4% p.a. [compounded annually]

1. The revised interest rates apply only to the "new accounts" opened during the respective period (except PPF and Sukanya Samriddhi Scheme, where the new rate is applied on the outstanding account balance).

2. For the existing accounts under all other schemes, the contracted interest rate remains unchanged until maturity.

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