Drawing from hugely-popular 401k pension plans in the US, Sebi has proposed a new Mutual Fund Linked Retirement Plan (MFLR), which it expects to generate over Rs 18,000 crore annual inflows into capital markets.
The 401k plans are very popular in the US and act as additional retirement savings for citizens beyond pension plans provided by the government and their employers.
Along with tax benefits, these plans are also known to provide good returns to their investors. Total investments in these plans are estimated to be a staggering amount of about $2.5 trillion (over Rs 150 lakh crore).
Akin to these 401k plans, Securities and Exchange Board of India (Sebi) wants the government to provide tax incentives for MFLRP schemes as well and expects them to generate annual inflows of at least Rs 18,000 crore, while becoming a major tool for channelising household savings into capital markets.
According to a Sebi proposal, the government can provide tax breaks on investment up to Rs 50,000 in MFLRPs, or alternatively enhance the enhance the limit under Section 80C of Income Tax Act to Rs 2 lakh to help such investments become eligible for tax benefits.
Currently, Section 80C provides tax breaks on investments totalling Rs 1 lakh in various products including certain mutual funds, insurance plans and provident fund.
Mutual funds attract only a small portion (2.5%) of household savings in India, unlike the US where this ratio stands at nearly 44%.
In the US, mutual funds account for over $6 trillion (over Rs 370 lakh crore) or about 28% of nearly $22 trillion pension market.
Sebi said that schemes similar to 401k of the US can be found in many other jurisdictions internationally, whereby, tax-related and other incentives provided by the government have led to significant increase in share of long term retail money in mutual funds.
On a conservative side, Sebi estimates that even if 10% of about 3.6 crore individual tax-payers participate in the proposed MFLRP with a contribution of Rs 50,000 per annum, it would lead to an annual inflow of Rs 18,000 crore of long-term money into capital markets through mutual funds.
This long term product would play a very significant role in mobilising household savings to the capital markets and would bring greater depth in the markets, according to Sebi.
"Such depth brought by the domestic institutions would also help in curbing the unwanted volatility in the capital markets and would reduce the excessive reliance on the foreign institutional investors," the regulator said.
"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 further said in its proposal. Nearly 45 fund houses in India together manage assets worth over Rs 9 lakh crore, but fund mobilisation has been a tough task for them in the past few years.
With a long-term policy, Sebi has sought to make mutual funds much more appealing as a long-term investment product by proposing tax and other benefits to boost the sector.
According to Sebi, there is a huge scope for growth in the country's retirement benefits market as only around 12% of the existing workforce is covered by Pension Fund Regulatory and Development Authority (PFRDA) and a large workforce in the unorganised sector, vast majority of which has no retirement benefits.
This gives MFs an opportunity to play a meaningful role during the accumulation phase of retirement planning in addition to that of the providers of national pension scheme (NPS), employee provident fund (EPF) and public provident fund (PPF).
Notably, majority of subscription in NPS are from government employees. Hence, MFLRP may seen as targeting the audience who are not subscribers to NPS and give them an option to save for long term coupled with tax benefits.
Currently, mutual fund industry has got two retirement plans which have tax exemptions. These plans are floated by UTI and Franklin Templeton.
Giving details about MFLRP, Sebi said that people between 18 and 55 years of age would be eligible to join such scheme which could have minimum lock-in period of five years.
For these schemes, Sebi has sought 'E-E-E' category tax benefit, which would provide them tax exemption at the time of investment, accrued income as well as withdrawal stage.
As per the Sebi proposal, these schemes can be allowed for two kinds of investments -- contributions made directly by salaried or self-employed individuals; and contributions made by employer on behalf of employees along with a contribution by the individual.
Sebi has also proposed that MFLRP can follow an age- linked investment model that will automatically lower exposure to equities as the investor grows older to minimise the risks.
Investors can withdraw up to 100% of balance after attaining 60 years of age. Before attaining 60 years of age, the investor can withdraw contributions which have completed minimum lock-in period or more subject to certain conditions like applicability of exit load.
Full withdrawal can be allowed in case of exigency such as death of the investor, permanent disability or terminal illness without applicability of any exit load.