The 401k plans are very popular in the US and act as additional retirement savings for citizens beyond pension plans provided by the government and their employers.
Along with tax benefits, these plans are also known to provide good returns to their investors. Total investments in these plans are estimated to be a staggering amount of about $2.5 trillion (over Rs 150 lakh crore).
Akin to these 401k plans, Securities and Exchange Board of India (Sebi) wants the government to provide tax incentives for MFLRP schemes as well and expects them to generate annual inflows of at least Rs 18,000 crore, while becoming a major tool for channelising household savings into capital markets.
According to a Sebi proposal, the government can provide tax breaks on investment up to Rs 50,000 in MFLRPs, or alternatively enhance the enhance the limit under Section 80C of Income Tax Act to Rs 2 lakh to help such investments become eligible for tax benefits.
Currently, Section 80C provides tax breaks on investments totalling Rs 1 lakh in various products including certain mutual funds, insurance plans and provident fund.
Mutual funds attract only a small portion (2.5%) of household savings in India, unlike the US where this ratio stands at nearly 44%.
In the US, mutual funds account for over $6 trillion (over Rs 370 lakh crore) or about 28% of nearly $22 trillion pension market.
Sebi said that schemes similar to 401k of the US can be found in many other jurisdictions internationally, whereby, tax-related and other incentives provided by the government have led to significant increase in share of long term retail money in mutual funds.
On a conservative side, Sebi estimates that even if 10% of about 3.6 crore individual tax-payers participate in the proposed MFLRP with a contribution of Rs 50,000 per annum, it would lead to an annual inflow of Rs 18,000 crore of long-term money into capital markets through mutual funds.
This long term product would play a very significant role in mobilising household savings to the capital markets and would bring greater depth in the markets, according to Sebi.
"Such depth brought by the domestic institutions would also help in curbing the unwanted volatility in the capital markets and would reduce the excessive reliance on the foreign institutional investors," the regulator said.
"Allowing mutual funds to launch MFLRP would help investors gain from the expertise of a large talent pool of asset managers who are already managing the existing funds of mutual funds efficiently with the support of research and analyst teams," it further said in its proposal.