Budget 2023 | Mutual fund industry body seeks launch of pension-oriented MF schemes

Ahead of the Union Budget, the Association of Mutual Funds in India (AMFI) has asked the government to introduce Mutual Fund Linked Retirement Scheme (MFLRS), which would be eligible for the same tax concessions available to National Pension System (NPS). Notably, investment in NPS is eligible for tax deduction under Section 80CCD (1) & 80CCD (1B) of the Income Tax Act, 1961, with Exempt-Exempt-Exempt (E-E-E) status.

Allowing mutual funds to launch MFLRS would bring pension benefits to millions of Indians in unorganized sector, AMFI said.

Currently, 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, Mutual Fund schemes which are similar in nature, i.e., which are retirement/pension oriented, and which are specifically notified by CBDT, qualify for tax benefit under Section 80C. Currently, each Mutual Fund Pension Scheme needs to be notified by CBDT for being eligible for tax benefit u/Section 80C on a case-by-case basis involving a lengthy time consuming process, AMFI said.

In 2014-2015, there was an announcement under ‘Financial Sector - Capital Market’ about “UNIFORM TAX TREATMENT FOR PENSION FUND AND MUTUAL FUND LINKED RETIREMENT PLAN”. This implied that Indian Mutual Funds would be able to launch Mutual Fund Linked Retirement Scheme

(MFLRSP) which would be eligible for the same tax concessions available to NPS. However, there was no reference to this in the actual Finance Bill, disappointing the mutual fund industry.

AMFI has proposed that the tax treatment for NPS and Retirement/Pension oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Section 80CCD of IT Act, 1961, considering that the characteristics of both are similar, AMFI said.

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

Contributions made by employer should be allowed as an eligible ‘Business Expense’. Likewise, contributions made by the employer to MFLRS schemes up to 10 percent of salary should be deductible in the hands of employee, as in respect of Section 80 CCD (2) of the Income Tax Act, 1961.

Withdrawals made from MFLRS should be exempt from income tax up to the limits specified for tax- exempt withdrawals from NPS, AMFI said.

The mutual fund industry body also asked CBDT, in consultation with SEBI, to issue appropriate guidelines/notification in this regard as has been done in respect of ELSS, obviating the need for each Mutual Fund to apply individually to CBDT to notify its MFLRP as being eligible for tax benefit u/Section 80CCD.

As per AMFI, there is very strong case for bringing Mutual Funds Retirement Benefit/Pension Schemes under Section 80CCD instead of Section 80C to bring parity of tax treatment for the pension schemes and ensure level playing field.

"Empirically, tax incentives are pivotal in channelizing long-term savings. For example, the mutual fund industry in the United States witnessed exponential growth when tax incentives were announced for retirement savings. 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," AMFI said.

A long-term product like MFLRS can play a catalytical role in channelizing household savings into securities market and bring greater depth. Such depth brought by the domestic institutions would help in balancing the volatility in the markets and would reduce reliance on the FPIs.