Retirement mutual fund schemes with taxation benefits: A good alternative for traditional pension products

By Nivesh Gyan   24 July

Category: Retirement Planning

Retirement planning no longer means investment in pension funds only; in fact, there are retirement mutual fund schemes that are specifically designed considering the long-term goal of retirement to ensure a stable flow of income post-retirement.

How do Retirement mutual funds work?

  • These funds invest in a mix of securities comprising of equity, equity related instruments and fixed income securities
  • There is a lock-in period of 3-5 years
  • Most of the schemes levy an exit load on redemptions before a particular age
  • Most of such schemes offer the option of SWP Option (Systematic Withdrawal Plan) once the investor attains retirement age (on or after 60 years of age), which means that an investor can opt for monthly/quarterly/annual SWP option

Snapshot of some of the retirement mutual fund schemes

Reliance Retirement Fund HDFC Retirement Savings Fund Franklin India Pension Fund UTI Retirement Benefit Pension Fund
Features 2 options:

  • Wealth Creation Plan (65%-100% Equities)
  • Income Generation Plan (0%-35% Equities)
3 Options:

  • Equity Plan (80%-100% Equities),
  • Hybrid Equity Plan (60%-80% Equities), and
  • Hybrid Debt Plan (5%-30% Equities)
One option:

  • up to 40% in Equities
One option:

  • up to 40% in Equities
Exit Load 1% up to age of 60 1% up to age of 60 3% up to age of 58 5% up to 1 year,
3% for 1-3 years,
1% on more than 3 years and up to age of 58
Lock-in Period 5 years 5 years 3 years Nil

How are Retirement mutual funds better than traditional pension plans?

  • There is no need to buy an annuity, as is the case with the National Pension Scheme (NPS) or pension plans from insurance companies. Instead, one can opt for a systematic withdrawal plan to meet the regular cash flow needs
  • NPS restricts equity exposure to 50%. However, there are mutual fund retirement schemes where one can take a 100% equity exposure
  • Mutual funds’ pension products offer greater liquidity as the investor can withdraw the accumulated corpus after the lock-in period is over

Retirement mutual fund schemes and taxation

Less than 1 year 1-3 years More than 3 years (LTCG)
Equity 15% Tax applicable 10% above ₹1,00,000 capital gains 10% above ₹1,00,000 capital gains
Debt Based on Individual’s Tax Slab Based on Individual’s Tax Slab 20% Tax applicable with benefit of indexation