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Mutual funds (MFs) are looking to launch a retirement product with tax breaks and a promise of pension. HDFC Asset Management and Reliance MF have approached the Securities and Exchange Board of India (Sebi) to launch retirement savings schemes but are yet to get a nod to launch these in the absence of clearance from the Central Bureau of Direct Taxes for tax-exemption under section 80 (C). Other MFs are keeping to the sidelines for clarity before applying to the regulator to launch this product.
“We are still waiting to hear from the regulator and the ministry on the approval for this product,” said Sundeep Sikka, chief executive officer, Reliance MF.
While Reliance MF applied for approval for its Reliance Retirement Fund in June 2012, HDFC filed for its HDFC Retirement Savings Fund in November this year. The product would be the second category in the MF basket to receive approval for tax exemption under Section 80(c). Under Section 80(c), individuals can invest up to ~1 lakh in certain government-approved financial products for tax breaks.
Therefore, some industry watchers believe the launch of retirement savings schemes by MF houses could see tax-exempt equity-linked savings schemes (ELSS) moving out of the industry product basket. This is because the proposed guidelines under the Direct Taxes Code (DTC) make no provision for fresh investments into ELSS products. “As of now, there is very little clarity on the future of ELSS products. The new DTC guidelines do not have any grandfathering provision for fresh investments into this scheme,” said Nehal D Sampat, associate director, tax and regulatory services, PwC.
The MF sector has made representations to the government for greater clarity on the future of the product owing to the popularity of the schemes. In case the proposed guidelines under the DTC are implemented as they are, these products could be phased out overnight.
Officials say this is unlikely, as it will jeopardise the investments of scores of investors. They are hopeful under the new DTC guidelines, the industry will be able to retain both product categories. However, some are questioning the unfair advantage to the sector, which will then have two products with tax breaks.
“The retirement savings scheme is a product with a long-term perspective. The aim of the scheme is to provide retirement income for those in the unorganised sector who do not have any planning,” said Sikka. “The ELSS, on the other hand, is a short-term product which provides tax breaks and has a three-year lock-in. These products are not linked to each other.”
