Need for flexible pension plans, mutual funds

The likelihood of a populist budget fuels a host of aspirations of the common man, year after year. In keeping with this trend, expectations are multifold from the Union Budget that will be presented by Union Finance Minister Nirmala Sitharaman on February 1. This is notwithstanding the fact that with an eye on next year's general elections, it could turn out to be a populist budget.

The FM has already indicated that the government will continue to work for the middle class in the upcoming budget. Towards this, the government has been focusing on job creation, building infrastructure, smart cities, among others, to fulfill the aspirations of the workforce.

However, in the absence of any formal pension scheme for the private sector, many prefer to invest in mutual funds to meet their post-retirement requirements. Currently, the National Pension Scheme (NPS) is entitled for an additional tax exemption of Rs 50,000 under Section 80CCD. The mutual fund industry has for long been demanding that tax treatment for NPS and retirement/pension-oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Sec. 80CCD of the IT Act, 1961.

This will bring tax treatment parity for pension schemes and ensure level-playing field. Besides, fund houses should be allowed to launch Mutual Fund Linked Retirement Plan (MFLRP) similar to the 401(k) Plan in the US, which would be eligible for tax benefits. Tax incentives are pivotal in channelizing long-term savings. For instance, the US mutual fund industry reported rapid growth when tax incentives were announced for retirement savings.

Pension funds can emerge as sources of funds in infrastructure and other projects with long gestation period. Pension funds can provide depth to the equity market (absorbing stocks arising out of the government's disinvestment program).

Furthermore, mutual funds offer many features like 'Income Distribution cum Capital Withdrawal (IDCW) formerly known as Dividend Plan, Growth option, direct and regular plans.

Mutual fund investors sometimes switch between Growth Option to Dividend Option (or vice-versa), and/or from Regular Plan to Direct Plan (or vice-versa). Currently, such switches are treated as 'transfer' under Sec. 47 of the Income Tax Act, 1961 and liable to capital gains tax. In such switches, the amount invested remains in the mutual fund scheme and there are no realized gains as the underlying securities/portfolio remains unchanged.

Unit Linked Insurance Plans on the other hand are not subject to capital gains tax for switching within a plan.

To conclude, similar products should get similar tax treatment and hence this tax arbitrage needs to be done away with. Similarly, the insurance industry is batting for reduction of the 18 per cent GST from health and life insurance products to make them more affordable. Additionally, increasing the limit to claim tax deductions under section 80C and 80D will further increase adoption of life and health insurance products.

Alongside, special support, incentives and/or deductions can be introduced for MSMEs that provide health insurance to employees and their families. This will help provide cover to the missing middle.