Along with Equity Linked Savings Schemes there is one more category of funds that provides tax benefits to the investors. Such schemes are termed as ‘Pension schemes’ by MF. Read this space to know more about these schemes and its features.
Individuals can get a tax benefit for the purpose of their retirement planning through investments in pension products under the Rs 1 lakh deduction limit under Section 80C of the Income Tax Act. The main way in which the pension benefit is obtained is through the insurance route as insurance companies have the policies that offer this benefit over a period of time. However there is one more option available in the pension space in the form of two mutual funds that also strive to provide pension for their unit holders but this is largely unknown to most investor. Here is a look at the features of this tax saving option.
Mutual fund tax benefit schemes are usually thought of as Equity Linked Savings Schemes (ELSS) but there is another category in the form of pension plans that are offered to the investors. There are only two funds that are in existence in this category and these are the Templeton India Pension Plan and UTI Retirement Benefit Pension Plan. These funds were launched in the nineties and hence there is also a long track record that is present with these funds so the investor also has the ability to look at the past record to see how they have performed during good and bad times.
Nature of funds
The nature of these funds is that they are balanced funds with a higher percentage of their portfolio present in debt. This translates into a position where the fund has a small percentage usually in the range of 30 to 40 per cent of the portfolio into equities and the remaining into debt. Since this is meant to be a retirement product there is a lower amount of risk that is sought to be present in the portfolio and hence this is the reason for this particular investment composition. The other point is that the fund will not have a dividend payout option because this is meant to conserve the funds of the investor till retirement and only the growth and the dividend reinvestment option will be present for selection. Under the dividend reinvestment option the amount of dividend is converted into additional units of the fund.
The other features of the fund are also something that need attention because some of them might be slightly different from other mutual funds. There is an option of continuous entry into the fund so the investor can put in any money at any point of time when they feel like it and this makes the overall investment process easier for them. When it comes to the question of withdrawal then there is a three year lock in that is present for the individual but after that the money can be withdrawn. In order to discourage the investors from withdrawing the amounts before they are 58 years of age there is a large exit load that is levied for withdrawals before that age.
The time period when the investor completes 58 years is significant from both side of making an investment as well as getting the required pension or withdrawal of the money. The investor can invest into the fund only till the time that they are below 58 years of age. Once they touch this age then there is a choice to them to either take the full amount of the investment value as a payout in one go or choose a regular withdrawal that will generate a cash flow that seems like a pension. The mutual fund will redeem the required units each month to generate amounts for the regular payout. In terms of taxation the same treatment as other mutual funds for the redemption of units will be applicable so the idea is that the long time period could lead to situation wherein there is a long term capital gains tax on debt funds that will be applicable for the investment.