Jan 2, 2009

India - SEBI urged to launch IRA scheme for households

Ashok Dasgupta

NEW DELHI: Apex chamber Assocham has urged the Securities and Exchange Board of India (SEBI) to introduce individual retirement account (IRA) scheme for large households to enable investment in equity market through various mutual funds.

In a representation to the market regulator, the chamber has underscored the need for promoting long-term inflows into equities by floating IRA schemes so that households make their investments through various mutual funds to reap the benefits of their long-term plans.

The IRA scheme concept, prevalent in developed economies such as the U.S. and some countries in Europe, is broadly aimed at savings plans to create wealth over a period, which could then be available for the individual’s post-retirement period.

To incentivise individuals to join the IRA schemes, the chamber has suggested tax concessions such as a deferred tax system under which each contributor to the proposed IRA could invest up to Rs 5 lakh in a year in a mutual fund scheme for investment in equity or in a combination of equity and debt, as per the investor’s choice.

Lock-in period

The lock-in period recommended for such investment is a minimum period of 10 years which can be withdrawn only after the investor attains the age of 58 or 10 years after investment, whichever is earlier.

Assocham has suggested that while the amount invested in the IRA scheme should be tax deductible, dividend and capital appreciation should be exempted from taxes when the investor withdraws the amount, as is permitted under the EET (‘Exempt, exempt tax’) facility.

According to the chamber, such a scheme will promote long-term investments in equity and debt and also ensure a reasonable post-retirement income when the individual investor would be on a relatively lower tax bracket.

For the non-tax paying category also, the IRA scheme could be promoted by permitting mutual funds to offer such investment avenues.

The IRA scheme, the chamber said, would thus help individuals to build their retirement benefit schemes and, at the same time, channelise the savings of the community to the capital market. The diversion of savings of the household sector to the capital market would provide a steady flow of substantial amounts that would also act as a buffer against volatile inflows and outflows of foreign institutional investors (FIIs).

Assocham also pointed out that though the Government has permitted provident funds (PFs) to invest 10 per cent of their corpus in equity-based mutual fund schemes, the guidelines have not been finalised as trustees of these funds are not permitting such investments. “It is time that the difficulties, if any, are removed and provident funds and gratuity funds are allowed to be invested in mutual funds also,” it said.

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