Salary Deductions through Payroll Mutual Fund SIP: Unlocking EPF and NPS-like Tax Benefits for Employees

SEBI's Proposal to Allow Payroll-Linked Mutual Fund SIPs Could Change Investing Habits

The Securities and Exchange Board of India (SEBI) has proposed a draft framework that would allow employees of listed companies, EPFO-registered establishments, and Asset Management Companies (AMCs) to invest in mutual funds directly through salary deductions. This move could make mutual fund contributions as seamless as monthly Provident Fund (PF) deductions, changing the way salaried employees invest.

Under the proposed framework, employees would be able to opt in for payroll-linked mutual fund SIPs, which would be deducted from their post-tax salary. This is in contrast to employer-backed retirement structures such as the Employee Provident Fund (EPF) or the National Pension System (NPS), where contributions reduce taxable income before the deduction happens.

Comparison of EPF and NPS with Payroll SIPs

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As per the current proposal, payroll SIP contributions would not provide any tax benefits. However, experts suggest that tax-saving mutual funds, such as Equity Linked Savings Schemes (ELSS), could still find a place within the framework. Amol Joshi, Founder of PlanRupee Investment Services, said that investment in ELSS qualifies for a deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act.

Nikunj Saraf, CEO of Choice Wealth, believes that employers can offer optional ELSS-linked payroll SIPs as part of employee financial wellness programs, which can help create a habit of wealth creation alongside retirement savings. However, any tax deduction built around Section 80C would largely benefit employees staying in the old tax regime, while recent tax reforms have increasingly encouraged migration toward the new regime.

Experts argue that payroll SIPs should not become another tax-driven product. Mutual funds and NPS are built for different outcomes, with NPS primarily designed as a retirement and social security instrument. Dr Suresh Surana, a Mumbai-based Chartered Accountant, said that extending NPS-like tax incentives to mutual funds would require careful policy evaluation.

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The larger objective, according to Saraf, should be encouraging disciplined long-term investing rather than creating excessive tax-driven flows. Suranjana Borthakur, Head of Distribution & Strategic Alliances at Mirae Asset Investment Managers (India), added that payroll SIPs may succeed even without a tax incentive because convenience itself can change investor behaviour.

The proposal has merit with or without a tax overlay, Borthakur said. Payroll SIP, once it scales, will benefit employees in the formal and organised sector. Whether there will be a separate tax deduction remains to be seen, but in the meantime, investors should see this from beyond a tax-saving lens, like regular and disciplined investment towards their long-term financial goals.