Finance Minister Arun Jaitley's Budget proposal to allow income tax deduction of Rs. 50,000 for contribution to the New Pension Scheme (under Section 80CCD) has enthused domestic fund managers.
Mr Jaitley's incentive on contributions to the NPS should result in more domestic money flowing into stock markets, says SV Prasad of Chime Consulting.
NPS is a voluntary pension scheme, which is regulated by the Pension Fund Regulatory and Development Authority. However, unlike the employee provident fund (EPF), investors opting for NPS have the option for choosing stocks, government bonds and other securities as their asset choice. The equity part of the allocation is capped at 50 per cent. (All You Want to Know About Tax Breaks on NPS)
Analysts like Mr Prasad are hopeful that tax breaks on NPS investment will ensure increased domestic liquidity and reduce volatility in stock markets.
Why Domestic Flows are Crucial for Stock Markets:
The BSE Sensex and Nifty have rallied over 50 per cent since September 2013, but the huge gains have come on account of large foreign inflows. India has received a net $51.6 billion in investments into shares and debt since the start of 2014.
Foreign funds flowing into stocks and bonds are considered to be "hot money" or investments for short term to capitalise on quick profits. Such funds can exit markets as quickly as they come, leading to higher volatility and meltdowns.
Mr Prasad says higher flows into NPS would provide much-needed liquidity with domestic fund managers, which can come handy at a time when Indian markets come under redemption pressure from foreign investors.
"This is a huge trigger for domestic stock markets... Look how the US stock markets took off from 1980s on the back of 401(k) money. It's that kind of moment this government has announced," said Mr Prasad.
Prashasta Seth of domestic brokerage IIFL said tax break on NPS investments will lead to much stronger domestic flows and help Indian markets; it will also help in managing volatility of markets, he said.
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