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National Pension System-like tax rules for retirement mutual funds and DLSS in AMFI’s Budget 2022 wishlist

Budget 2022 expectations for Mutual Funds: retirement/pension oriented mutual fund schemes qualify for tax benefit under 80C, when specifically notified by CBDT.

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Budget 2022 expectations for Mutual Funds: Ahead of the upcoming Union Budget, the Association of Mutual Funds in India (AMFI) has proposed the government to allow Mutual Funds to launch pension-oriented schemes with uniform tax treatment as National Pension System (NPS). It has also proposed the introduction of the Debt Linked Savings Scheme (DLSS) on the lines of the Equity Linked Savings Scheme (ELSS).

Currently, three types of investment avenues are available for post-retirement pension income in India – NPS, retirement/pension schemes offered by mutual funds and insurance-linked pension plans offered by insurance companies.

Additional tax deduction of Rs 50,000 is available for investment in NPS. This is over the Rs 1.5 lakh limit under Section 80C. However, retirement/pension oriented mutual fund schemes qualify for tax benefit under 80C, that too when specifically notified by CBDT.

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As per current, mutual fund pension schemes need to be notified by CBDT for tax benefit under section 80C. AMFI said that CBDT does this on a case to case basis involving a lengthy time-consuming process.

“Thus, presently only a handful of Mutual Fund Retirement Benefit/Pension Schemes which have been specifically notified by CBDT qualify for tax benefit under Section 80C,” AMFI said in its proposals for Budget 2022-23.

Budget 2014-15 and even SEBI had earlier proposed the introduction of Mutual Fund Linked Retirement Plan (MFLRP) with similar tax treatment as NPS.

“It is proposed that all SEBI registered Mutual Funds should be allowed to launch pension-oriented MF schemes, namely Mutual Fund Linked Retirement Plan (MFLRP), with similar tax benefits as applicable to NPS under Section 80 CCD (1) & 80CCD (1B) of Income Tax Act 1961, with Exempt-Exempt-Exempt (E-E-E) status on the principle of similar tax treatment for similar products,” AMFI said.

Providing justification of its demand, AMFI said:

  • Allowing Mutual Funds to launch MFLRS would bring pension benefits to millions of Indians in unorganized sector.
  • Empirically, tax incentives are pivotal in channelising 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.
  • A long-term product like MFLRS can play a catalytical role in channelizing household savings into securities market and bring greater depth.

Debt Linked Savings Scheme (DLSS)

AMFI has also requested the Government to introduce DLSS to help “deepen the Indian Bond Market”.

It is proposed to introduce the “Debt Linked Savings Scheme” (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits which will help in deepening the Indian Bond Market.”

AMFI further said that DLSS will provide an alternative fixed income option with tax breaks to retail investors and help retail investors to participate in bond markets at low costs and at a lower risk as compared to equity markets.

This will also bring debt oriented mutual funds on par with tax-saving bank fixed deposits, where the deduction is available under Section 80C, it added.

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