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The Budget is likely to make pension products of all mutual funds as tax saving instruments. Such a provision, once implemented, will not just help investors, but fund houses too.
“The thinking is to allow tax benefits at the time of investment. This will encourage investors to go for long-term products offered by mutual funds,” a person familiar with the development told Business Line .
It is believed that apart from the fund industry, the market regulator, SEBI, was actively pushing for such an instrument.
At present, mutual funds can launch pension products, but the problem is with tax. Barring mutual fund schemes such as UTI Retirement Benefit Pension Fund and Templeton India Pension Plan (formerly known as Kothari Pioneer Pension Plan), an individual gets no tax benefit at the time of investing in a pension product offered by a mutual fund.
However, this is not so with pension plans offered by insurance companies.
The existing pension plans of mutual funds are designed to provide pension after the age of 58. With such an aim, they levy an exit load between 1 and 5 per cent, if the money invested is withdrawn before the age of 58. These schemes usually invest up to 40 per cent in equity and the rest in debt.
Draft design
No tax benefit at the time of investment discourages mutual funds from launching pension products. This is why SEBI had asked the Mutual Fund Advisory Committee and the Association for Mutual Funds in India (AMFI) to prepare a draft design for pension products by the industry. Now, an effort is on to make this a part of the Budget announcement, a senior Government official confirmed.
Pension products with tax saving option will serve a dual purpose. On the one hand, it will provide long-term funds for fund houses; on the other, investors will have one more option for long-term investment, he added. Such a move may give fillip to funds facing heavy outflow.
Facilitating various mutual funds to launch pension products is being considered at a time when the Prime Minister and the Finance Minister have promised to revive the mutual fund industry. Dhirendra Kumar, CEO of Value Research, said, “Such a move will help the industry get a long-term fund, which will, in turn, help the stock market. It is estimated that the industry can mobilise Rs 50,000 crore through pension funds.”
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