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The only difference in Tier 2 is that you can allocate 100% to equity. So some people use this option as an alternative low cost equity mutual fund. And then switch to Tier 1 at the end to avail the tax benefit.

You can do that. The advantage of the "Tier-2 to Tier-1 move just before you attain 60" strategy is that you have the flexibility of no lock in in case you need the funds before 60.

As a friend pointed out to me, if you have 50% more funds in Tier-2 than Tier-1, and move it entirely to Tier-1 just before age 60, your entire Tier-2 becomes tax free.

Illustration:
Funds in Tier-1: 1,00,000
Funds in Tier-2: 1,50,000

Total in Tier-1 just before age 60 after moving from Tier-2 to Tier-1: 2,50,000
Lumpsum Tax-free withdrawal at age 60 (60% of Total): 1,50,000

Remaining 1,00,000 to be used for purchasing mandatory annuity.

As illustrated, if you need a lumpsum at age 57/58/59, you would have invested in some other instrument (MFs or so) and then withdraw it. This would be taxable. Investing in Tier-2 as a substitute to MFs makes it entirely tax-free as I illustrated above.

"Entirely tax-free" is misleading here because you'd be locking up 40% of your total corpus in a relatively low yielding annuity for the rest of your life and it's taxable at your slab rate as well.

You'd need to work out the math, whether paying tax @ 12.5% of LTCG on MF, with 100% of your corpus in your own hands would be more beneficial or not. :)

If the instrument becomes at par with all other debt instruments, wouldnt that lead to the questioning the need of EPFO as an organization? Just think about it, govt would save costs by not paying salaries, maintaining the real estate, etc.

It is a formidable corpus though - 33rd largest pension fund in the world - 248 Bn USD at last declaration. Would the govt succumb to the desire to generate this financial whip for our markets and continue with the regulations of minimum contribution? Or would they make a good chunk of voters happy by reducing governance - the tax revenue is same in either case so don't see that as a problem.

Food for thought.

Hello Smartcat - While looking at index fund, I saw HDFC has index funds for G-Sec also with different funds matched to maturity from 2026 and 2036.

I guess this can be an alternate to direct investment in Government bonds and securities as there is no entry or exit load. I am aware returns will be quite less and okay if it is similar to FD.

However few questions -

1. Since the fund is tied to G-Sec, it shows maturity date. What happens to MF upon maturity date of underlying G-S4c? Does MF being wound up automatically and units redeemed?

2. What is the taxation of this MF? Is it like debt funds and taxed now at slab rates? So is there any income tax advantage with this funds compared to FD apart from deferred tax?

I also saw they named it as Nifty G-Sec fund. Is it because the bonds are traded in exchange?

Kindly help.

1. These are called FMPs (Fixed Maturity Plans) and all major AMCs that play in debt segment have it - ICICI, SBI, etc. Yes, my understanding is redemption is automatic as the date is dependent on underlying index being tracked which is based on GSecs / SDLs with set maturity

2. Slab. Unfortunately as when I bought in March 2023 we were told this is the last opportunity to avail indexed LTCG on this kind of instrument. Then this July we were hit with a gut punch and this advantage was taken away. Still, your advantages are you will beat FD returns slightly as returns are being compounded and you can select a longer maturity product (5+ years).

Second, as rate cuts happen (again wishful thinking at this moment) the value will go up as FMPs make money through sale and purchase of bonds linked to the underlying index and price is inversely proportional to yield. The inclusion of India Gsecs in JPMC emerging markets index and FTSE Russel index has also helped with fund flow (incoming) and therefore value. The recent events post nov 5th have weakened the flows but one hopes for more positive events than negative events.

hope this helps while smartcat adds more.

Apparently yes. The units are redeemed automatically on maturity date.

You lose deferred tax benefits by investing in such a fund, since units are redeemed. That's why we are better off investing in a gilt fund.

Just like how NSE creates equity indices (eg: NSE Auto Index), they also create bond indices like this. 'Nifty' is NSE's brand.
https://www.niftyindices.com/


These are called 'Target Maturity' funds. Here is the full list:
https://www.valueresearchonline.com/...uspended-plans

Difference between FMP & Target Maturity Fund is that the former is closed ended scheme while the latter is open-ended. That is, in a target maturity fund, you can buy/sell the fund anytime. You don't have to wait till maturity to exit the fund.

Any advantage of FMP over TMP or vice-versa?

Ok. Lets dive in a little bit. It is slightly off topic for this thread, but still useful for everyone. At the end, I am only trying to state facts here.

When I started by career in 2004, EPF for me was an Exempt(1)-Exempt(2)-Exempt(3) investment. I always looked down on folks who withdrew their PF on every company change.

Exempt(1) - Employee contribution fully was tax exempt. + Employer contribution was tax exempt.
Exempt(2) - The interest earned on Employee + Employer contribution was fully tax exempt
Exempt(3) - PF was fully tax exempt on withdrawal.

This WAS a solid product.

Fastforward to now:

The current status of EPF is PartialExempt(1)-PartialExempt(2)-Exempt(3). So from E-E-E we are already at PE-PE-E. Let me explain for everyone's benefit.

PartialExempt(1) - Employee contributions to EPF - No deduction in New Tax Regime. Upto 1.5 Lakhs allowed under 80C in old tax regime. For Employer contributions to PF + NPS totalling 7.5 Lakhs is exempt. Rest is not.
PartialExempt(2) - Interest earned on EPF upto 2.5Laks every year is exempt. And the rest is held in a separate account and taxable.
Exempt(3) - Withdrawal is tax exempt. This still continues. But beaware that once the growing period is taxed, withdrawal doesnt matter. The growth is killed in Step 2.


With the above being the current status of EPF, no one has raised what it is for? I dont expect anyone to raise it in the future as well.
And do tell me, if EPF is still different from any debt instrument.

Now one could argue, there are very few folks who will hit the max caps of 2.5Lakhs, 7.5 Lakhs, etc. Very true - as on date. And that is the exact reason why no one cares. And we are not a significant vote bank for the govt to worry about.

Wait for 10 years and you will have a significant portion of the middle class in this bracket. But by then everyone would have gotten used to the status-quo.

And 'no', no sane government is going to increase the limits on these to a higher number.

Your quote on the size of the PF fund - is a fact - but not relevant.

-Yours truly,
An EPF Hostage

I was under the impression that the tax on interest exceeding 2.5L is only for voluntary contributions, and not for the mandatory employee or employer contributions.

Your point is very valid. EPF is truly a jail. It should be made voluntary, but no government will do it, as it is a steady cash flow for the government. The liabilities every year can easily be managed by the incoming cash flow.

Well. Well. If anyone is still doing VPF (Voluntary PF), we should build a temple for them.

Target Maturity Funds are good if you are doing goal-based planning and if you can match your goals with the maturity target of any of the available funds. The underlying securities, backed by central or state governments, are relatively safer and the returns are also predictable.

It is, and I have no love for the EPF nor did I want to spend my day off this way but its very polluted outside so I'll elaborate.

GoI currently forces organized sector employers to make a certain percentage of your basic pay as EPF contribution (12% I think). It further mandates that basic pay be no less than 40% (50% since 2022). So, it has mandated a certain minimum contribution to the EPF via the tax paying, organized working class.

To be clear, they cant do anything about self employed, professional, businesses, unorganized, categories so who is left - people like us.

The GoI further changed the PF rules back in 2015 to allow EPFO to invest in equities. It was purportedly to 'earn higher returns on its investments'. Said limit was further raised to 15% last year or so. The further mandate is to invest only in PSU stocks and only via ETFs. This gives the govt a very powerful tool to influence valuations of select ETFs such as CPSE and in turn the PSUs underlying (CPSE has only 11 stocks if memory serves me right). Would they let it go? At present ~9% of your ''debt instrument'' money is actually in equity ! https://labour.gov.in/sites/default/...pib1947416.pdf

So the point, my dear, is that you and I cannot determine whether the scheme is attractive or not [hum ooparwale ke haath ki kathputliyan hain jahanpanah]. The scheme is here and we are doomed to participate in it till we are working for the organized sector. EEE or TTT doesn't matter to the govt. If some ministry thinks tomorrow that their listed entity valuations are falling they can lobby the govt to deploy more EPFO funds and this limit can be raised.

No, it is total. Government does not care if you are doing a VPF or not in addition to the default PF.

EPF has now become a Jail. Until it was Exempt Exempt Exempt category, it was a very good debt instrument for long term.

What is the tax rate if the earned PF interest > 2.5 lakhs?

Contributions higher than 2.5 lakhs is held in a seperate account and will show in your EPF pass book. The interest earned on this taxable account will show up in your Form 26AS.

And this is taxable at your slab rate.