The Association of Mutual Funds in India (AMFI) has proposed several changes in the upcoming budget. One of these includes allowing SEBI-registered mutual funds to launch pension-oriented mutual fund schemes, called Mutual Fund Linked Retirement Schemes (MFLRS).
This may have tax benefits aligned with those of National Pension System (NPS) under Sections 80CCD (1) and 80CCD (1B) of the Income Tax Act, 1961.
This proposal includes several key points:
Uniform tax treatment: MFLRS should receive the same tax benefits as NPS, including Exempt-Exempt-Exempt (E-E-E) status.
Employer contributions: Both employer and employee contributions should be considered for tax benefits, with employer contributions recognised as a business expense under Section 36(1)(iv a) and deductible up to 10% of salary for employees under Section 80CCD (2).
Tax-exempt withdrawals: Withdrawals from MFLRS should be tax-exempt up to the limits specified for NPS.
Streamlined notification process: AMFI urges that CBDT, in consultation with SEBI, issue guidelines to automatically qualify MFLRS for tax benefits, similar to the process for ELSS, eliminating the need for individual notifications.
Justification
The proposal from AMFI is backed by these arguments:
Parity in tax treatment: Aligning the tax treatment of mutual fund pension schemes with NPS would create a level playing field, eliminating the current tax arbitrage.
Expansion of pension benefits: Allowing mutual funds to launch MFLRS would extend pension benefits to millions of Indians in the unorganised sector, offering them a viable retirement planning option.
Channeling long-term savings: Historical evidence, such as the growth of the mutual fund industry in the United States following tax incentives for retirement savings, shows that tax benefits play a crucial role in encouraging long-term savings.
Market depth and stability: Long-term products like MFLRS can channel household savings into the securities market, enhancing market depth and stability.
This domestic institutional depth can balance market volatility and reduce reliance on Foreign Portfolio Investors (FPIs).
Support for infrastructure projects: Pension funds can provide critical funding for infrastructure and long-gestation projects, contributing to economic growth and development.
Background
In India, retirement planning is supported by three primary investment avenues: the National Pension System (NPS), retirement or pension schemes offered by mutual funds, and insurance-linked pension plans.
Currently, the tax treatment of these products varies significantly, with NPS enjoying favorable exemptions under Section 80CCD, while mutual fund pension schemes only qualify for tax benefits under Section 80C if they are individually notified by the Central Board of Direct Taxes (CBDT).
This process is lengthy and cumbersome, resulting in only a few mutual fund pension schemes being eligible for tax benefits.
Historical context
It is worth noting that in the ‘Key Features of Budget 2014-2015’, there was an announcement about “UNIFORM TAX TREATMENT FOR PENSION FUND AND MUTUAL FUND LINKED RETIREMENT PLAN”.
However, this promise did not materialise in the Finance Bill, disappointing the mutual fund industry.
SEBI’s long-term policy
SEBI, in its “Long Term Policy for Mutual Funds” published a few years ago, proposed that mutual funds be allowed to launch pension plans similar to the 401(k) Plan in the US, eligible for tax benefits.
The policy emphasised that similar products should receive similar tax treatment and the need to eliminate tax arbitrage resulting from different regulatory oversight.
Potential impact
Implementing AMFI’s proposal would have far-reaching positive impacts. It would simplify the tax regime, making it more equitable, and encourage more individuals to invest in retirement plans.
The increased participation in mutual fund pension schemes would deepen the securities market, providing more stability and reducing reliance on foreign investments.
Additionally, the funds accumulated could be directed towards infrastructure projects, supporting economic development.