Industry officials and financial advisors feel that such the move can be a win-win situation for the mutual fund industry, advisers and investors.
The government is looking at SEBI’s proposal to introduce mutual fund linked retirement plans (MFLRP) under 80 CCD, said a report published in the Economics Times. SEBI had proposed that a long term product like mutual fund retirement plans with tax incentive can play a significant role in mobilizing household savings to the capital markets.
Last year, the draft budget document had a mention on uniform tax treatment for pension fund and mutual fund linked retirement plan.
If implemented, fund houses can launch these retirement products directly by getting approval from SEBI. Currently, fund houses need to take approval of Central Board of Direct Tax (CBDT) to provide tax benefits to investors.
Secondly, the report said that the government will consider extending the tax benefits provided under 80CCD of the Income Tax Act (just like National Pension Scheme) to mutual fund retirement plans. This act provides tax benefits over and above the 80C limit which is currently Rs. 1.5 lakh annually. Investors get tax deduction of up to 10% of salary, subject to up to Rs.1 lakh on his contribution towards pension funds. Currently, NPS doesn’t come under EEE (exempt, exempt and exempt) status.
However, SEBI had proposed that the investment under mutual fund retirement plans to be categorized under EEE status. Simply put, the investment in these schemes will be subjected to tax exemption during all three phases i.e. investment, accrual phase and redemption.
Now, the government has two options – to provide uniform tax treatment for pension funds and MF retirement plans or give separate status to MFLRPs due to its different product design. It remains to be seen whether the Finance Minister is going to address this issue during the union budget on February 28.
Many fund houses - Axis, DSP BlackRock, HDFC, Pramerica and SBI have already filed draft offer documents with SEBI to launch their retirement linked mutual funds and are awaiting approval from CBDT. Recently, Reliance Mutual Fund has launched its tax saving cum pension scheme called Reliance Retirement after receiving pension fund status from CBDT. The other two funds which had received pension fund status much earlier are UTI and Franklin Templeton.
Dinesh Khara, Chief Executive Officer, SBI Mutual Fund is of the view that such a move will benefit the industry and advisers. “Pension money is long term money. Typically, a major portion of pension money is deployed in government securities and corporate bonds. Through MF retirement plans, fund managers can take a strong position in equity market along with a moderate exposure to debt components to deliver optimal returns in a long run.”
Hemant Rustagi of Wiseinvest Advisors said “Advisors would have clients for the next 20-25 years which eventually helps improve service standards. This would be a win-win situation for the industry, advisors and investors.”
In an earlier interview with Cafemutual, Himanshu Vyapak, Deputy CEO, Reliance Mutual Fund had said, “Retirement is a huge opportunity for mutual funds and for advisors. A number of studies show that 4 out of 5 people are not prepared for their retirement. Only 11% of the Indian workforce has any security in the form of pensions etc. on retirement. In Australia, the retirement assets are 147% of GDP. In most developed countries, retirement assets form 70% of GDP. In India, the entire retirement space constitutes less than 15% of GDP. So, the opportunity is big.”
The industry will grow manifold if retirement money flows in mutual funds. This could be a first step in this direction.
