Recently SEBI proposed (on 13/02/2014) one of the wonderful pension product called Mutual Fund Linked Retirement Plan (MFLRP). The main emphasis of this plan are to bring in more investors into equity and retirement planning, flexibility and more tax sops. Such features lacking in NPS or in any other current retirement products.
Currently in India only around 12% of existing workforce is covered under retirement benefits. Also majority of NPS contributor are from Government Employer. Hence the need of product which caters to all was felt and accordingly this scheme was proposed.
As of now in India only two mutual fund companies offer retirement product. One is from UTI Mutual Fund, which is called UTI Retirement Benefit Pension Fund and another is from Franklin Templeton, which is called Templeton India Pension Fund. Whatever you contribute to these funds will be automatically eligible for Sec 80C of IT Act, 1961. These two funds were launched on 26th December 1994 and 31st March 1997 respectively. But after that none of the mutual fund companies tried to launch such retirement product as new scheme does not automatically qualify under this tax deduction.
Features of Mutual Fund Linked Retirement Plan (MFLRP)-
- Any Indian citizen (resident or non-resident), whose age between 18 years to 55 years will be eligible for MFLRP.
- There will be some minimum yearly contribution required from participant and SEBI proposed penalty for participant who not maintain their account active. How much will be yearly contribution is still yet to know.
- There will be lock-in for your investment for example 5 years.
- But contribution made after 55 years would be locked-in till participant attains the age of 60 years.
- Participant can withdraw 100% after attaining 60 years of age.
- But one can withdraw before 60 years of age also if contributions are free from lock-in (subject to exit-load).
- Full withdrawal before participant attains 60 years of age will in some special cases like death of participant, permanent disability or terminal illness. Such emergency withdrawal will not have any exit loads.
- After 60 years of age one can opt either lump sum withdrawal or in a phased manner.
- Phased withdrawal will be through Systematic Withdrawal Plan (SWP). Such SWP will be either on monthly, quarterly, half yearly or yearly.
- Again in this phased withdrawal option, one can choose the flat amount or % of the balance.
- You can increase your withdrawal limit yearly to match the inflation.
How to contribute to MFLRP?
- Whether you are self employer or salaried, being participant you can directly contribute to MFLRP.
- If you are salaried then your employer have option to contribute to this scheme by matching contribution from their end. But employer contribution will be decided by individual employer.
Which mutual fund schemes are eligible for MFLRP?
- Funds that own securities directly and meet the asset allocation and other criteria prescribed by MFLRP.
- Fund-of-Funds of the existing schemes of mutual fund companies. But to qualify under this category, the underlying fund must have minimum 3 years track record, minimum monthly AUM of Rs.300 Cr in the presiding 36 months and diversified funds but not sector specific funds. Such Fund-Of-Funds will not be allowed to charge an additional fee.
How asset allocation will be done in MFLRP?
You have three options to choose based on your comfort.
- This plan proposes to be age linked asset allocation. Hence as you grow older, your equity exposure will get reduced accordingly.
- Another type of allocation is based on “Investor Risk Profile” based. This will be like for conservative portfolio 0-30% in equity, moderate portfolio 50-65% in equity and an aggressive portfolio 50-100% in equity.
- But irrespective of age and risk profile of participant, if one reaches the age of 55 years then his portfolio will be switched to age linked asset allocation.
Switching facility in MFLRP–
- One can easily switch from different asset allocation model.
- One can switch from MFLRP of one mutual fund company to another company without capital tax implications freely.
Proposed Tax Incentive in MFLRP–
- An additional Rs.50,000 tax benefit be allowed and this will be above and over Rs.1,00,000 limit of Sec 80C.
- Also if any unutilized amount within Rs.1,00,000 under Sec 80C may be allowed to invest in MFLRP and get deduction under Sec 80C.
- This product must be E-E-E. Means whatever you invest under this scheme will be tax deduction, accrued income from this scheme will be tax exempt and finally withdrawal also be tax exempt. Currently PPF scheme have such facility.
- For salaried, employer+employee benefit will be considered for calculating tax benefits.
- Contributions made by employer towards this scheme will be treated as “Business expense” in the Profit & Loss Account of Employer.
- Finally any switch of MFLRP between mutual funds may not be treated as transfer and exempted from capital gain tax.
My view about MFLRP–
Currently this plan is just a proposal from SEBI, but in my view it is in right direction. Eventhough NPS was launched with much fanfare as lowest retirement product, but it failed to garner the subscriber list. Hence I hope that this plan with so many proposed tax benefits, flexibility to investors and best alternative to NPS will be a huge success. Below are some positive points of this scheme.
- Lock is just 5 years.
- 100% withdrawal after 60 years of age.
- If withdrawal is in phased manner then plenty of options like monthly, quarterly, half yearly, yearly or increasing your withdrawal based on inflation.
- No compulsion to buy any annuity plan after retirement.
- Plenty of funds under which one can invest through this scheme.
- Convenient asset allocation strategy.
- Easy switch facility among funds.
- Huge tax advantages proposed.
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