Since Budget 2024 announced a higher LTCG tax on equity mutual funds and removed indexation benefits for old debt fund units, many readers have asked us if they could use the tier II account of NPS for tax-free rebalancing.
Although this response is expected and unsurprising, it is still frustrating and disappointing. Investors are ready to invest in a product
- which is not directly accessible (one must have an NPS tier I account with its limitations* to be able to open a tier II account);
- * Money is locked up to age 60 because 80% will have to be annuitised if we exit earlier.
- Whose investment mandate or benchmark most do not know (partly because they don’t care and partly because it is hard to find). Yes, you can find it if you want to. And what would you find? A bunch of vague statements
- with a portfolio the very definition of diworsification (too many securities with small weights)
- with unknown taxation (never been explicitly specified by the government, arguably making it taxable as per slab upon redemption).
All they see are its recent returns and freedom to change asset allocation without tax incidence, and that is enough to abandon all reason and assume it is better because we can “escape” the tax associated with rebalancing.
How can we be so unprofessional when it comes to our well-being?
It is impractical to assume one could avoid rebalancing and the tax that comes with it just by investing more in NPS tier II!
Once I have a clear goal, a deadline, and a target corpus in mind, I need an asset allocation that I can control. For this,
- liquidity is essential. We must be free to redeem whenever we want.
- Products with clear, narrow investment mandates are essential
My goal is to reduce the volatility in my portfolio value as I slowly build it to reach closer and closer to the target portfolio. If I have to pay tax, so be it. I will not let taxes deter me from my goal. I have accepted tax as a necessary evil and learned to look beyond that.
So, I will never invest in a product only because it allows tax-free rebalancing. What you do is up to you.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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