SEBI to Introduce Mutual Fund Retirement Plans with Tax Benefits in 2015 Budget

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Investors may soon receive tax benefits in retirement plans run by the Mutual Funds Companies (MFCs). Under section 80CCD of the income tax, the government is considering the proposal by capital market regulator SEBI to introduce retirement savings plan that will enable tax deduction to the investors.

The government is likely to announce this in the upcoming Union 2015 budget. SEBI has proposed that long-term products like Mutual Funds (MFs) will play a significant role in mobilizing the household savings and the capital markets. Investors in the National Pension Scheme (NPS) are eligible to claim income tax deduction.

Securities and Exchange Board of India (SEBI) has proposed to categorize investors under the EEE status that stands for exempt, exempt, exempt. EEE means that the investors are allowed tax deduction, and there is no need to pay tax on the returns, and the investment should be tax-free at the time of withdrawal.

NPS has different tax treatment for the mutual fund pension products. Primary differentiator between the NPS and MF is that the employers are exempt upto 10% of their salary in NPS. A uniform tax treatment of the pension products like NPS will enhance the capability to penetrate the working population and garner the long-term capital from mutual funds.

In the current scenario, tax incentives are provided under section 80C of the income tax act in India. It includes products such as Employee Provident Fund (EPF), Public Provident Fund (PPF), NPS, life insurance premium, Equity Unit Linked Plans (ULIPs) and Equity-Linked Saving Schemes (ELSS) among others.

Surveys indicate that MFs, ELSS and the pension plans are ranked lowest in the priority list of the investors. This tax incentive would thus help in attracting funds to the mutual fund.

Under EPF scheme 1952, the mandatory requirement to have a membership is to earn up to Rs. 6,500 per month. The above threshold population will have the option to choose EPF where both the employee and the employer can contribute equally. Most of the contributors to the EPF are voluntary donors.

All over the world, it is evident that whenever the governments have provided tax incentives the number of the investors and shares of the long-term mutual funds has raised. The mutual fund plan linked to the retirement plan is designed similarly to the U.S. government’s 401(k) plan.

Market-linked retirement planning has been one of the turning points for the high-quality retirement savings across the world. It has been catering the saver's benefit for a long time. Savers have a choice in the scheme selection and flexibility. They also get returns from the savings with the mutual fund.

SEBI has proposed that all the mutual funds must be allowed to launch pension schemes that are eligible for tax benefits under section 800CCD. Currently, there are three mutual funds offering pension plans available for claiming deduction under section 80C of the income tax act of India.

ELSS route have been helping most of the first-time investors to invest in the mutual funds. Tax savings is the big draw for the investors across all the categories of mutual funds. Due to section 54ea and 54eb there was a rise in the number of investors in the longtime equity of the mutual fund schemes in the year 1999 to 2000, which enabled investors to save on capital gains.

The regulator also proposed that transactions related to the merger of the mutual fund schemes should be treated as an exemption from the capital gains tax. Currently, when a shareholder gets shares in a merged company, it is not observed as a transaction and is not subjected to capital gains tax.

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