Union Budget: In its list of demands to Finance Minister Nirmala Sitharaman, the Association of Mutual Funds in India (AMFI) has asked the government to allow SEBI-registered mutual funds to float pension-oriented mutual fund schemes with tax benefits under the prevailing tax regimes.
In a note to the government, the AMFI said the mutual fund houses should be allowed to bring in Mutual Fund Linked Retirement Schemes (MFLRS) with tax benefits aligned with those of National Pension System (NPS) under Sections 80CCD (1) and 80CCD (1B) of the Income Tax Act, 1961.
Presently, there are three broad investment avenues for post-retirement pension income: (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 Sec. 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. 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 the note.
The Amfi has asked for following tweaks:
> Mutual Fund Linked Retirement Scheme (MFLRS) should have Exempt Exempt-Exempt (E-E-E) status on the principle of similar tax treatment for similar products. > It is also 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 Sec. 80CCD of IT Act, 1961, considering that the characteristics of both are similar. > 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’ under Section 36(1) (iv a) of Income Tax Act,1961. > Likewise, contributions made by the employer to MFLRS Schemes up to 10% 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 as in section 10(12A) and 10(12B) of the Income Tax Act, 1961.
Benefits
> SEBI, in its “Long Term Policy for Mutual Funds” published a few years ago , had proposed that Mutual Funds be allowed to launch pension plans, namely, Mutual Fund Linked Retirement Plan’ (MFLRP) akin to 401(k) Plan in the U.S. which would be eligible for tax benefits > It was also emphasized in the aforesaid Long Term Policy 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 the need for restructuring of tax incentive for Mutual Fund Pension schemes. > Thus, there is very strong case for bringing Mutual Funds Retirement Benefit / Pension Schemes under Sec. 80CCD instead of Sec.80C to bring parity of tax treatment for the pension schemes and ensure level-playing field. > Allowing Mutual Funds to launch MFLRS would bring pension benefits to millions of Indians in unorganised 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.
Taxability of NPS
The National Pension System (NPS) serves as a crucial financial instrument for individuals in the salaried middle class demographic, enabling them to save on taxes and strategize for retirement. The National Pension System comprises two account types: Tier I and Tier II. Tier I account is subject to tax deductions, whereas Tier II accounts do not offer any tax benefits.
Tax advantages within the NPS framework extend to three main sections:
a) 80CCD(1) - This segment permits investment of up to ₹1.50 lakhs with deduction eligibility. Notably, this deduction falls within the broader ₹1.50 lakhs limit of 80C. Given the various avenues for 80C deductions, such as provident fund contributions, Equity Linked Saving Scheme, Public Provident Fund, home loan repayment principal, children's tuition fees, and term insurance premiums, individuals should prioritize utilizing this section through NPS for optimal tax benefits.
B) Under section 80CCD(1B), individuals are eligible to claim an additional deduction of up to Rs 50,000, which is in addition to the existing Rs 1.50 lakh deduction available under section 80C. It is essential to highlight that this particular deduction is exclusive to the old tax regime and is not applicable in the new tax regime.
c) Under Section 80CCD(2), a deduction is available for salaried employees whose employers have enrolled with the National Pension System (NPS). The deduction limit is up to 10% of the basic salary. It's important to note that this deduction is applicable under both the new and old tax regimes.
NPS provides tax benefits under the Exempt-Exempt-Exempt (EEE) status. This means that the invested amount, capital growth, and maturity proceeds are all exempt from taxes. However, when it comes time to withdraw funds from the NPS, 40% of the accumulated corpus must be used to purchase a pension-bearing annuity. The pension income received from the annuity will be taxable according to the individual's income tax slab rate.