There are three broad investment avenues for post-retirement pension income in India. The are:
(i) National Pension System (NPS).
(ii) Retirement /Pension schemes offered by Mutual Funds.
(iii) Insurance-linked Pension Plans offered by Insurance companies.
Mutual Fund Retirement Benefit or Pension Schemes qualify for tax benefit under Section 80C. However, each scheme needs to be notified by Central Board of Direct Taxes (CBDT) for being eligible for tax benefit on a case-to-case basis involving a long bureaucratic process.
As far as tax eligibility is concerned, all SEBI registered mutual funds should be allowed to launch retirement or pension plans, namely, ‘Mutual Fund Linked Retirement Plan’ (MFLRP), which should be eligible for tax benefits under Sec. 80CCD (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.
Alternatively, would also recommend that CBDT, in consultation with SEBI, may issue appropriate guidelines or notification in this regard as done with respect to ELSS, obviating the need for each mutual fund to apply individually to CBDT to notify fund under the retirement category as being eligible for tax benefit under Section 80CCD.
Thus, there is a strong case for bringing Mutual Funds Retirement Benefit or Pension Schemes under Section 80CCD instead of Section 80C to bring parity of tax treatment for the pension schemes and ensure level playing field.
The point I am trying to drive home is that long-term products like mutual funds in the retirement category can be a catalyst in channelising household savings into the securities market and bring greater depth to the markets. Such depth brought by the domestic institutions would help in balancing the volatility in the markets and would reduce reliance on Foreign Portfolio Investments(FPI).