On the 11th of July, the day after the budget, I wrote in this newspaper, “However, the budget has another great new investment avenue which seems to have been introduced by stealth. It finds no mention in the speech, and all that one has is this somewhat cryptic sentence in the ‘Budget Highlights’ document that comes with the budget papers. Here’s what it says, ‘Uniform tax treatment for pension fund and mutual fund linked retirement plan’. Mutual fund linked retirement plans sounded like a great idea and--coupled with a much higher investment limit under section 80C--the best part of the budget for savers. The problem is that this particular bit of the budget has gone missing in actual action.
However brief, one thing is clear from what the budget highlights say, that something called ‘mutual fund linked retirement plan’ would be allowed to come into existence. This wasn’t exactly a surprise, because it had been part of SEBI’s recommendations to the government for a long time. In fact, it was a major part of the ‘Long-term mutual fund policy that SEBI had formulated and released earlier in the year. SEBI had actively campaigned for mutual fund retirement plans. In fact, a few hours after the budget speech, I congratulated a senior SEBI functionary on retirement plans finally seeing the light of day. He was happy that it had happened, but somewhat surprised.
The idea of a mutual fund retirement plan has been in the air for a long time. What the point in the budget highlights appears to say is that a class of mutual fund plans will be allowed which will get the same tax benefits as NPS. Essentially, savers will be able to invest in these plans till retirement, get a tax break under section 80CCD.
The problem is that there is no official word on when and in what shape will this actually happen. Of course, any official notification can only come after the budget is passed but the problem is that there appears to be nothing in the budget that appears to pertain to mutual fund retirement plans. The finance act makes no changes to the Income Tax Act that could make such plans possible, nor is there anything in the ‘Notes on Clauses’ which explain all other provisions of the budget make no mention of the retirement plans either. All that is there is the brief reference on page 12 of the Budget Highlights document.
Unfortunately, the Budget Highlights, although released along with the rest of the budget papers to the public, is more in the nature of publicity material. Unlike the speech or the finance act or the other papers, it has no statutory status. And that’s the problem. Have mutual fund retirement plans actually been permitted? If so, where’s the enabling measure? And if not, how come the mention in the Budget Highlights? Or is there some mistake somewhere. Was that sentence inadvertently included in the highlights? Perhaps something about retirement plans was planned for the budget but actually not included.
If this is indeed what has happened, that the retirement plan measure has actually not been implemented and was included in the Budget Highlights by mistake, then that would be a great pity. Very few Indian savers have any long-term, retirement-focussed savings which go into high yielding equity-backed assets. Most of us have a completely upside down asset allocation. Short-term investments tend to be in equities while retirement money goes into fixed-income investments which barely yield anything above the inflation rate. In effect, we end up with the volatility of equity, plus the poor long-term real returns of fixed-income.
Mutual fund retirement plans will be the ideal way to start fixing this problem. Provided they actually come into existence.