Approval for retirement linked plans from mutual funds will get easier and long term money will come in such funds. However, investors will not get indexation benefit.
A sentence ‘uniform tax treatment for pension fund and mutual fund linked retirement plan’ tucked away in the draft budget document says many significant things.
Firstly, mutual funds should now be able to launch retirement products which have been more or less out-of-bounds for them. Only two fund houses have retirement linked pension plans – Franklin Templeton Pension Fund and UTI Retirement Benefit Pension Fund.
Last year, three fund houses – HDFC, Pramerica and Reliance had filed offer document with SEBI to launch the retirement linked plans which presumably did not get approval as there was ambiguity regarding their eligibility to be treated as retirement funds.
Fund houses can launch these retirement products directly by getting approval from SEBI.
Secondly, the tax treatment of proceeds of all pension products will be the same irrespective of whether it is a pension fund under national pension scheme (NPS) or mutual fund.
Today, there is a significant difference between the tax treatment of pension funds under NPS and mutual funds. Pension funds under NPS have a tax status of Exempt Exempt Tax (EET). Simply put, contribution towards NPS is taxable at the hand of investors. Currently, any capital gain is added to annual income and taxed according to tax slab of individual.
However, in existing retirement plans of mutual funds, investors enjoy indexation benefit. Clearly, if the proposed uniform tax treatment comes into existence, it will make mutual fund retirement product less attractive. The move will benefit NPS which will no doubt be more cost effective than retirement plans of mutual funds.
“I agree that the proposed regulation can make it less attractive; however, retirement linked mutual funds have the potential to outperform other asset classes in the long term due to their better fund management strategy,” said Hemant Rustagi of Wiseinvest Advisors. He said that NPS subscribers have to mandatorily annuitize 40% of accrued corpus which is not the case with mutual funds.
“Tax arbitrage had to go one day. The proposed uniformity is a part of it. On the other hand, in the budget highlight, the finance minister has at least talked about mutual funds which was not the case earlier. Sooner or later, CBDT will give its clarification on mutual funds linked retirement plans which is a good sign,” said the sales head of a foreign fund house.
Dinesh Khara, Managing Director and Chief Executive Officer of SBI Mutual Fund is of the view that the move will benefit the industry. “Just like growth and dividend options, we may have retirement option in which money will be locked in till the investor attains 58 years of age. Such plans will ensure optimal returns in the long term. Also, compared to other retirement products like NPS, mutual funds have a stronger distribution force to reach and service investors.”
Though
the proposed regulation can make mutual fund linked retirement plans less
attractive in terms of taxation in the current scenario, the industry will grow
manifold if retirement money flows in mutual funds. This is the first step in
this direction. Industry is expecting to see more clarity from CBDT in future
for mutual fund linked retirement plan. A silver lining is that the NPS is
expected to get EEE status with implementation of the new direct tax code,
which will help mutual fund retirement plans too.
