New Delhi, Aug. 13: The government is considering a proposal to allow mutual funds and insurance companies to float a new breed of annuity plans that will be loosely modelled on the popular 401-K plans offered in the US.
Officials say that this is one of the proposals that has been tossed up after finance minister P. Chidambaram ordered his team of advisers to come up with ways to revive the floundering mutual fund and insurance sectors. The revival of investor interest in the two sectors is critical to the achievement of the broader objective of ratcheting up the savings rate, which has dipped from 36 per cent in 2007 to a little over 32 per cent this year.
The government can notify the annuity schemes floated by mutual funds and insurance firms under Section 80C of the Income Tax Act, 1961. If that is done, investments will qualify for a tax waiver within the overall ceiling of Rs 1 lakh for a range of investments that include the popular provident funds. The tax will kick in when the annuity is actually drawn, not while it is saved or invested.
A Sebi-appointed advisory committee on mutual funds headed by former SBI chief Janki Ballabh had come out with a set of recommendations to revive the mutual fund industry, one of which was 401-K style annuities.
A 401-K annuity scheme in the US are investments made out of deferred payments, usually paid after retirement. These are “defined contribution plans” with annual contributions capped at $17,000 currently. The employee can choose the proportion in which the sum can be invested between equity and debt.
In the Indian adaptation, it will be a pure state-guaranteed debt variant to take care of objections from unions and Left parties.
Reliance Mutual Fund has already approached Sebi with an annuity scheme on these lines in a bid to obtain a first mover advantage. Typically, these funds would be locked in for at least five years unlike mutual funds which are locked in for three years.
Such annuity schemes normally invest in gilts or government backed securities and blue-chip stocks. The proceeds are usually channelled into long gestation projects such as power plants and airports where the rate of return is not high but steady with a low volatility risk and, therefore, more attractive for a pension fund.
The finance ministry is also looking at some of the insurance and mutual fund firms floating schemes which can compete for the New Pension Scheme which it floated some years back. These could be dovetailed into the 401-K style annuity plans.
The LIC manages more than 80 per cent of the NPS money; another 10 per cent is handled by SBI Life.
Officials say some more entities may be permitted to offer some innovative products.
Officials said the government is starting to focus on a slew of retirement schemes because the country will have some 200 million senior citizens by 2050 from the 80 million at present. Unless something is done now, most of them will have no income cover.