Jan 31, 2017 09:46 AM IST | Source:

Budget 2017: Should align tax treatment of MF retirement plans with NPS

We look forward to few changes in terms of (a) increase in tax exemption limit under Section 80C for ELSS Schemes (b) additional limit under Section 80CCD for investment in mutual fund linked retirement benefit/pension schemes.

Nityanand Prabhu

Post demonetization, a major step initiated by the government, now it is important for the government to demonstrate its commitment to growth by articulating crucial reform measures. This budget may dramatically change the pace of tax reform. Tax rates on individual tax payers could be reduced or at least the threshold and tax brackets changed to provide incentives for declaring income and perhaps, to boost consumption. Rationalization of corporate tax is expected to revive corporate spirits. While there may not be any positive surprises in capital gains taxes, there has been a widespread speculation that the government, in Budget 2017-18, may introduce new rules for taxing capital gains from stock investments. Currently, there is no tax implication for gains made from stocks that have been held for a year. This minimum holding period, according to reports, may be raised to 2 or 3 years. There is also no limit on the tax-free gains, which might be capped at a high amount. Currently, there is a 15% tax on stocks sold within a year, this may be increased to 20%.

Further, we expect some measures especially for small-scale industries impacted by demonetization. The budget may also tell us whether the government will do more to recapitalize banks. We also expect major push and incentives for digital transactions and investments in expansion of digital infrastructure. Some incentive for housing and housing finance such as increase in exemption limit on interest on home loans are also expected.  Government spending on roads and railways and other infrastructure is preferable to boosting consumption, because a big stimulus to consumption runs the risk of igniting inflation, particularly if oil prices remain high. That said, many analysts believe the government will boost consumption, particularly through rural spending.

As an industry, we look forward to few changes in terms of (a) increase in tax exemption limit under Section 80C for ELSS Schemes (b) additional limit under Section 80CCD for investment in mutual fund linked retirement benefit/pension schemes similar to 401(K) in the US (c) benefit of Section 54EC for debt linked savings schemes under mutual fund with specified lock-in period (d) tax treatment at par with equity funds for fund of funds which invests more than 65% in equities.  

Tax incentives are pivotal in channelizing long-term savings. For example, the mutual fund industry in the US witnessed exponential growth when tax incentives were announced for retirement savings. As of June 30, 2014, about 64% of 401(k) Plan assets were held in mutual funds, such as equity, balanced, bond, and money market funds. The remaining 401(k) Plan assets included company stock (stock of the employer), guaranteed investment contracts, bank collective trusts, life insurance separate accounts and other pooled investment products (  

For the growth of securities market, it is imperative to channelize long-term savings into the securities market. A long term product like mutual fund retirement plan can play a very significant role in channelizing household savings to the securities market.  There is a huge scope for growth in India’s retirement benefits market owing to low existing coverage and a large workforce in the unorganized sector, vast majority of which has no retirement benefits. NPS currently provides one such avenue.  Mutual funds could provide an appropriate alternative, given the maturity of the mutual fund industry in India and their distribution reach. This could be better achieved by aligning the tax treatment of mutual fund retirement products with NPS.

Indian investors are largely under-invested in equities. Even after so many years, the percentage of the Indian population participating in securities market in general and mutual fund industry in particular is miniscule. It is estimated that less than 1.5% of India’s population participates in the capital market.  Recognizing the need to channelize long term household savings into the capital market, the government has been taking various measures to encourage individual tax payers to invest in capital markets via mutual funds, through tax incentives u/Sec. 88 / 80C / 54EA / 54EB etc.  However, consequent on withdrawal of the benefit of capital gains tax exemption under Section 54EA and 54EB, the inflow of investments, which could have otherwise flowed into capital market, has altogether stopped and hence there is a need to re-introduce capital gains tax exemption for investment in mutual fund units, so as to incentivize investment in capital markets.

The author is COO of LIC MF
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