The famous quote, “nothing is constant but change” aptly defines life in the defense forces. Among the constant moves with limited time at each location, many of which are remote and poorly accessible, money management tends to take a backseat. Therefore, options such as the Defence Services Officers Provident Fund (D.S.O.P. Fund) and the Armed Forces Personnel Provident Fund (A.F.P.P. Fund) have been the most well-suited and preferred investment options for men and women in uniform for decades.
The Finance Bill of 2021 states that the interest on contribution made by a person exceeding ₹2.5 lakhs towards provident fund will be liable for taxation at their slab rates. While EPF is the most talked about segment that is impacted by this decision, there is still ambiguity and a rising concern if this limit is also applicable to General Provident Fund (GPF) and Contributory Provident Fund (CPF).
Let’s understand how the D.S.O.P. Fund and A.F.P.P. Funds are different from the EPF. The D.S.O.P. Fund and the A.F.P.P. Fund are governed by C.P. Fund (I) 1962 [Contributory Provident Fund (India) 1962] Rules, while the EPF is managed by the Employees’ Provident Fund Organization (EPFO).
The D.S.O.P. and A.F.P.P. Funds are non-contributory provident funds, which means that there are ‘no contributions’ made by the employer (army, navy, or air force) in these accounts, and they are purely funded by contributions from the salary received after paying all applicable personal income taxes. While the argument that EPF is misused by high-income earners and High-Net-Worth Individuals (HNIs) is being used to justify taxation on contributions exceeding the ₹2.5 lakh limit, this is not so in the case of the D.S.O.P. and A.F.P.P. Funds.
This is because, during field postings or in locations which are remote, defense personnel often tend to increase contributions to D.S.O.P. and A.F.P.P. Funds. So, a young officer earning around ₹10-12 lakhs a year often deploys ₹40,000-₹50,000 during a posting to forward areas since expenses are minimal. Of course, such contributions are not sustainable during peace postings and, thus, the contributions are managed accordingly. Another important difference is that the interest rates on these funds are lower (currently at 7.1 percent) than on EPF (currently at 8.5 percent).
While the finer details from the ministry are awaited, considering that it would impact D.S.O.P. and the A.F.P.P. Fund contributions, here are some alternatives that can be considered.
Public Provident Fund (PPF)
PPF is a government scheme open to all citizens offering compounded returns with an exempt-exempt-exempt tax status. This is very similar to D.S.O.P. and A.F.P.P. in terms of the interest rate; however, withdrawals are slightly restrictive. The tenure of PPF is 15 years and it is extendable in blocks of five years. The interest rate is aligned quarterly with the broader interest rate scenario in the economy. Opening a PPF can absorb up to ₹1.5 lakhs annually and can be done on a monthly basis (₹12,500).
This is a good option for young officers and those in other ranks since they have a longer service period. Those who are closer to retirement should be careful before committing to the PPF. However, considering that the subscriptions each year are eligible for claiming tax deductions u/s 80C, this can work for many even during retirement years.
Starting (or increasing) a monthly Systematic Investment Plan (SIP) is a good alternative for the long-term, as equities are inflation-beating assets and offer (non-linear) compounding. However, don’t look at the past returns and allocate a huge amount towards them. Equity mutual funds are suitable for those who have a long-time horizon and are comfortable with intermittent volatility. Equity mutual funds can work very well for meeting goals such as children’s education expenses, marriage, and building a retirement corpus.
Debt schemes offer a diversified portfolio of companies to which mutual funds have lent money. This segment is influenced by the movement of bond prices and interest rates in the economy. These schemes are a good choice for parking a lump-sum as well as doing a monthly SIP. A monthly SIP would work on the lines of a recurring deposit, but will offer the benefit of indexation for taxation on completion of three years, resulting in much lower than recurring or fixed deposits. Choose funds carefully after checking the portfolio and durations so that you avoid credit and interest rate risks. These funds are very well suited for near to medium-term goals.
As we discuss the various alternatives, it is equally important to understand what not to do. Avoid ULIPs or insurance-linked child and retirement plans—these products offer investment and insurance bundled together and therefore have high expenses. They offer limited insurance, do not give easy exits, and are less transparent. The opaqueness of these products often works in their favour; therefore, do not fall for these options. Avoid increasing your real estate portfolio by taking a home loan as an alternative. Lastly, it is also not a good idea to go overboard on fixed deposits or post office monthly income scheme since the payout is fully taxable at the slab rate.
Always remember to follow your asset allocation and invest in funds based on your risk appetite and financial goals.