Association of Mutual Funds in India BUDGET 2018-19 Alignment of Tax Treatment for Pension Schemes of Mutual Funds - MYREALITY.In, Real Estate, Share Market, Mutual Fund, Insurance
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Friday, January 26, 2018

Association of Mutual Funds in India BUDGET 2018-19 Alignment of Tax Treatment for Pension Schemes of Mutual Funds

Association of Mutual Funds in India

Alignment of Tax Treatment for Retirement / Pension Schemes of Mutual Funds and National Pension System.


Retirement planning has become very important due to longer life expectancy owing to improved medical and healthcare. There’s a significant increase in ageing population today, with no social security to fall back on. It is critical for individuals to accumulate sufficient funds that can sustain over long post-retirement life for healthcare needs and expenses (which could deplete one’s lifetime savings in case of critical illness). Hence, one has to plan to build the retirement corpus to help meet the regular income or any contingency post retirement.

India, like most of the developing economies, does not have a universal social security system and the pension system has largely catered to the organized segment of the labor force.

While, till recently, public sector and government employees typically had a three-fold structure comprising provident fund, gratuity and pension schemes, the bulk of the private sector (with the exception of few major corporates) had access only to provident funds, a defined-contribution, fully funded benefit program providing lump sum benefits at the time of retirement. The Employees’ Provident Fund (EPF) is the largest benefit program operating in India. Reflecting this state of affairs, the significance of pension funds in the Indian financial sector has been rather limited. In recognition of the possibility of an unsustainable fiscal burden in the future, the Government of India moved from a defined-benefit pension system to a defined-contribution pension system, with the introduction of the "New Pension System" (NPS) in January 2004.

Presently, there are three broad investment avenues for post-retirement pension income in India, namely :

(i) National Pension System (NPS).

(ii) Retirement /Pension schemes offered by Mutual Funds;

(iii) Insurance-linked Pension Plans offered by Insurance companies.

While NPS is eligible for tax exemptions under section 80CCD exclusively, Mutual Fund Pension Schemes qualify for tax benefit under Sec.80C, which is rather over-crowded with several other financial products such as EPF, PPF, NPS, Life Insurance Premia, ULIP, Tax Saving FDs, Home Loan repayment etc.

Moreover, currently each Mutual Fund Pension Scheme needs to be Notified by CBDT on a case-by-case basis involving a long and painful bureaucratic process for being eligible for tax benefit u/Section 80C.

SEBI, in its “Long Term Policy for Mutual Funds” (2014) has emphasized the principle that similar products should get similar tax treatment, and the need to eliminate tax arbitrage that results in launching similar products under supervision of different regulators and has stressed the need for restructuring of tax incentive for Mutual Funds schemes, ELSS and Mutual Fund Pension schemes.

Thus, there is very strong case for extending the exemption under Sec. 80CCD of Income Tax Act, 1961 for investments in Retirement Benefit / Pension Schemes offered by Mutual Funds (instead of Sec.80C) so as to bring parity of tax treatment for the pension schemes and ensure level playing field.

In fact, in the ‘Key Features of Budget 2014-2015’ there was an announcement under ‘Financial Sector - Capital Market’ about “UNIFORM TAX TREATMENT FOR PENSION FUND AND MUTUAL FUND LINKED RETIREMENT PLAN” (on Page 12 of the Budget Highlights document).

This implied that Indian Mutual Funds would be able to launch Mutual Fund Linked Retirement Plans (MFLRP) which would be eligible for the same tax concessions available to NPS. However, there was no reference to this either in the budget speech of the Finance Minister, nor in the Budget, disappointing a vast number of retail investors and the Mutual Fund industry.


As in the case of NPS, investment in Retirement Benefit / Pension Schemes offered by Mutual Funds upto ₹150,000 should also be allowed tax exemption under Sec. 80CCD of Income Tax Act, 1961, instead of Sec. 80C, with E-E-E status i.e., subscription being eligible for tax exemption, any accrued income being tax-exempt, and withdrawal also being exempted from tax.

• Where matching contributions are made by an employer, the total of Employer’s and Employee’s contributions should be taken into account for the purpose of calculating tax benefits under Sec. 80 CCD.

• Further, the contributions made by an employer should be allowed as an eligible ‘Business Expense’ under Section 36(1) (iva) of the I.T.Act.

• Likewise, contributions made by the employer up to 10% of salary should be not taxable in the hands of employee, as in respect of section 17(1)(viii) read with the Section 80CCD of the IT Act.

• The switches of MFLRP investments between mutual funds should not be treated as transfer and may be exempted from capital gain tax.

It is further recommended that CBDT, in consultation with SEBI may notify the guidelines giving the framework for Mutual Funds to launch MFLRP, which shall be eligible for deduction under Section 80CCD (as done in respect of ELSS), obviating the need for each Mutual Fund to apply to CBDT individually to notify its MFLRP for being eligible for tax benefit u/Sec.80CCD, obviating a long bureaucratic process that exists at present.


Empirically, tax incentives are pivotal in channelising long-term savings. For example, the mutual fund industry in the United States (U.S.) witnessed exponential growth when tax incentives were announced for retirement savings.
• Contractual savings systems have been improved, but pension funds in India are still in their infancy. In terms of size, India’s pension funds stood at 0.3 percent of its GDP, as against China's 1 percent or Brazil's 13 percent (Source: OECD, 2015).

• With a large ageing population and increased longevity and growing health care needs and medical expenditure in an inflationary environment, there is strong need to provide the individuals a long term pension product that could provide a decent pension which could beat the inflation. Considering that India's population is around 1.34 billion in which the share of the old (i.e., 60 years and above) is around 10 percent, pension funds in India have, in principle, a large potential - both as a social security measure as well as means to providing a depth to the financial markets, in both debt and equity market segments.

• Going forward, pension funds will emerge as sources of funds in infrastructure and other projects with long gestation period, as well as for providing depth to the equity market (perhaps looking for absorbing stocks arising out of disinvestment program of the government)

Thus, there is a huge scope for growth in India’s retirement benefits market owing to low existing coverage and a large workforce in the unorganized sector, vast majority of which has no retirement benefits. NPS provides one such avenue, albeit with limited reach. Mutual funds could provide an appropriate alternative, given the maturity of the mutual fund industry in India and their distribution reach. This could be better achieved by aligning the tax treatment of mutual fund retirement products / MFLRP with NPS.

• Market-linked retirement planning has been one of the turning points for high-quality retirement savings across the world. Investors have a choice in the scheme selection and flexibility.

• SEBI, in its “Long Term Policy for Mutual Funds” released in Feb. 2014, had proposed that Mutual Funds be allowed to launch pension plans, namely, Mutual Fund Linked Retirement Plan’ (MFLRP) which would be eligible for tax benefits akin to 401(k) Plan of the U.S.

• For the growth of securities market, it is imperative to channelize long-term savings into the securities market. A long-term product like MFLRP can play a very significant role in channelizing household savings into the securities market and bring greater depth. Such depth brought by the domestic institutions would help in curbing the volatility in the capital markets and would reduce reliance on the FIIs.

• Allowing Mutual Funds to launch MFLRP would help investors gain from the expertise of a large talent pool of asset managers who are already managing the existing funds of mutual funds efficiently with the support of research and analyst teams.

• It is pertinent to mention here that Mutual Fund asset managers also have experience in managing long term fund of EPF and NPS. Mutual Funds could play a meaningful role during the ‘Accumulation Phase’ of retirement planning in addition to that of the providers of the NPS, EPF and PPF.

• A majority of NPS subscribers are from government and organized sector. Hence, MFLRP could target individuals who are not subscribers to NPS especially those from the unorganized sector and provide them an option to save for the long term, coupled with tax benefits.

Association of Mutual Funds in India BUDGET 2018-19 Alignment of Tax Treatment for Pension Schemes of Mutual Funds Reviewed by Investment Guru on January 26, 2018 Rating: 5 Association of Mutual Funds in India BUDGET PROPOSALS FOR FY 2018-19 Alignment of Tax Treatment for Retirement / Pension Schemes of ...

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