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Savings may get level field
August, 25th 2008

In a move that would impact the small investor, the government has decided to revisit tax treatment of the new pension scheme (NPS), employees provident fund (EPF), unit-linked insurance plans (ULIP) and mutual funds. This follows demand from regulators such as SEBI and IRDA for a level-playing field between the windows which serve as major avenues of savings and investment for a large number of people.

Chief economic adviser Arvind Virmani has initiated a study to identify the tax changes necessary for a level playing field for NPS and EPF, ULIPs and MFs. For example, withdrawal from NPS is subject to exempt-exempt-tax (EET) while the levy is not applicable on EPF withdrawals.

A similar disparity between ULIPs and MFs has been discussed by an apex panel comprising financial sector regulators. Entry load has been scrapped on open-ended and close-ended MFs. However, there is no restriction on ULIPs, which are aggressively marketed by insurance companies, doling out huge commissions. A technical paper covering all the aspects would be prepared by Mr Virmani.

The paper would be presented to the High-Level Coordination Committee On Financial Markets (HLCCFM), which comprises representatives from RBI, PFRDA, IRDA and SEBI, that discussed the issue at its recent meeting. The panel had decided the inconsistencies in the tax system, particularly with respect to instruments in the financial markets, should be studied by the chief economic adviser.

Disparities in the tax treatment of various schemes also figured in the meeting. It may be pointed out that NPS is subject to EET regime, denying tax benefit at the time of withdrawal of the proceeds, in contrast with tax-free EPF withdrawals. Even though both schemes are similar in nature, tax treatment is different.

The view within the panel is that all contractual savings such as investments in PF and insurance schemes should enjoy tax benefits. There is no need to extend such benefits to non-contractual savings, the regulators feel. However, the decision has been left to the chief economic adviser.

In the MFs-versus-ULIPs debate, SEBI has circulated a paper seeking level playing field to serve retail investors better. The parity should be extended to all areas including tax benefits, regulations governing marketing, operations and expenses. In response, IRDA has argued about the uniqueness of ULIPs and the logic behind the different regulations. However, both the regulators will discuss the issue to examine the nature and characteristics of ULIPs and MFs and see if there is a need for level-playing field between them in terms of regulations and tax benefits.

As the capital market is hit by volatility and downturn, investment avenues such as MFs and ULIPs are of significance to the small investor. For the salaried class, returns on EPF and NPS are important as they serve as key post-retirement support.

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