The mutual fund industry has been lobbying the government to offer exclusive tax deductions to pension plans, but their efforts have been futile.

The working population is becoming increasingly cautious about retirement savings. And, mutual fund houses see an immense opportunity for expansion in this instrument/avenue.

At present, insurance companies dominate the pension plan sector in India. According to a report presented by Ernst & Young, premiums collected under pension plans account for nearly 1/4th of the insurance companies’ total collections.

What these companies often do is blend a vanilla savings scheme with an insurance component and sell this as a product. They promote it as being designed to suit the specific requirements of investors.

A retirement plan being one of them.

Now, a typical retirement plan requires an investor to invest throughout his or her working life-span. The accumulated funds in the account are utilised to buy an annuity from the insurance company. The nature of annuity may differ—immediate, deferred, limited period, etc.

The main bone of contention is, while these retirement plans enjoy tax benefits, pension plans don’t.

In fact, the mutual fund industry seems to be convinced that unless pension plans become tax-free, offering retirement plans as a stand-alone product doesn’t make much sense. This is precisely why only a few fund houses currently offer retirement plans.

Their aim is, if the government makes the pension plans tax-efficient, they could launch retirement-cum-pension plans more vigorously.

Moreover, the industry is optimistic about launching debt products offering tax-incentives—on the lines of Equity Linked Savings Schemes (ELSS). The mutual fund houses wish for the government to waive off taxes arising on account of a switch from one scheme to the other within the same fund house.

Amusingly, the industry also expects the government to forgo the Security Transaction Tax (STT) on the equity transactions made by the mutual fund schemes and Exchange Traded Funds (ETFs). Requests have been made to lower the holding period from three years to one year in debt schemes to avail the benefits of indexation.

However, industry experts are not unanimous. Some of them opine that the demands of the mutual fund industry are farfetched. The CEO of a big mutual fund house, on the condition of anonymity, told the media, "We guess the government is going to focus on reviving consumption. There may be some tax concessions, etc. to revive growth. It may also focus on rural and agriculture to revive growth. In this scenario, we don't think the government will have mutual fund industry in its radar.” This appears to be a prudent view in the present scenario.

Unless the pension as the source of income is made tax-free, it’s nearly impossible for the government to allow exclusive incentives to the mutual fund industry.

The industry has been receiving higher-than-ever inflows every month and the popularity of mutual fund schemes is growing fast. Therefore, the discussion about the government imposing tax on long-term capital gains on all equity investments——including those in equity mutual funds——sounds more relevant today. Since we are too close to some crucial elections, it may not want to take any decisions that have the potential to cause a social-political disruption.

They aim to launch New Fund Offers (NFOs), and by highlighting the tax benefits want to market them aggressively. But, they are more likely to come home disappointed.

Taking a step back, you should ask yourself why you want to invest in a pension plan or a retirement plan offered by an insurance company or a mutual fund. Structurally, these products are inflexible and have a high lock-in period.

The best way to grow your retirement corpus is to chalk out an asset allocation plan depending on your risk appetite and the years left for the retirement. Investing in diversified equity schemes through Systematic Investment Plans (SIPs) is the most suitable and effective alternative. Instead of locking the entire amount in a pension plan, you may prefer to opt for the Systematic Withdrawal Plan (SWP).

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