Explained: What is Mutual Fund - Voluntary Retirement Account scheme by AMFI and how is it similar to US 401(k)

With the share of the elderly in India’s total population expected to nearly double to 21% by 2050, indicating that every fifth Indian will be a senior citizen (60+) compared with one in 10 now, the need for a strong retirement savings system has become more urgent. As per the UN estimates, as of 2023, over 43% of the country’s population was under 25 years and just 11% above 60 years.

Drawing inspiration from the U.S. 401(k) plan—a voluntary, employer-linked retirement product managed by mutual funds, the Association of Mutual Funds in India (AMFI) has proposed the Mutual Fund- Voluntary Retirement Account (MF-VRA) scheme that aims to provide a voluntary, employer-linked retirement product managed by mutual funds.

According to the whitepaper jointly prepared by Crisil Intelligence and AMFI, the scheme would offer features such as voluntary participation, employer-sponsored options, managed by mutual funds, tax incentives, portability, and flexibility.

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The MF-VRA scheme would build on the long-term policy laid out by SEBI, enhancing the reach and promoting financial inclusion, and would ride on the growth of mutual funds in India, which has crossed Rs 75 lakh crore of assets as of July 2025. The success of the MF-VRA scheme depends on the collaborative efforts of regulatory enablers, operational design stakeholders, and other key players.

The benefits of the MF-VRA scheme would be multifaceted, enhancing pension penetration and coverage in the country, having a positive impact on economic growth, and reducing the burden of social security on the exchequer.

The scheme would also channel household financial savings into the financial markets, providing long-term stability and depth, and increasing the scale and efficiency of the mutual fund industry.

Additionally, the MF-VRA scheme would provide supplemental retirement planning and long-term allocation to productive assets for investors, ultimately leading to a more secure and sustainable financial future for individuals

“To make the MF-VRA scheme a success, stakeholders must work together to define the product structure, introduce tax deductions, establish portability provisions, create retirement lifecycle funds, and design user-friendly onboarding and goal-tracking tools,” the whitepaper said.

By following this, India can develop a robust pension system, supplementing retirement planning and providing individuals with a secure and sustainable financial future

Taking cues from global pension systems, Mutual Fund – Voluntary Retirement Account can be designed with features like voluntary participation, employer sponsored option, managed by mutual funds, tax incentives, portability and flexibility, and withdrawal rules.

What should each stakeholder do

Regulatory enablers - AMFI has asked stakeholders including Sebi, CBDT, and Ministry of Labour & Finance to bring in regulatory changes to create a conducive environment for the MF-VRA scheme. According to the whitepaper, Sebi will define the product structure, reporting standards, and disclosures for the MF-VRA scheme.

CBDT will introduce a specific tax deduction section for the MF-VRA scheme, providing tax benefits to contributors and incentivizing participation. And lastly, the Ministry of Labour & Finance, will coordinate with the Employees’ Provident Fund Organisation (EPFO) and the National Pension System (NPS) to establish portability provisions for the MF-VRA scheme.

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Operational design - In this AMFI has asked fund houses to create “Retirement Lifecycle Funds” with aggressive to conservative glide paths, catering to the diverse needs of contributors. These funds should be designed to automatically adjust the asset allocation based on the contributor’s age, risk tolerance, and retirement goals. Additionally, fund houses should enable systematic investment and withdrawal options, allowing contributors to invest regularly and withdraw funds as needed during retirement.

This scheme offers a co-contribution model voluntarily, where employers can contribute to their employees’ MFVRA accounts, promoting a culture of retirement savings and enhancing the overall attractiveness of the scheme. And lastly, the distributors/fintechs should design user-friendly onboarding and goal-tracking tools, enabling contributors to easily set up and monitor their MF-VRA accounts.

“By working together and fulfilling their respective roles, these stakeholders can ensure the success of the MFVRA scheme, promoting a culture of retirement saving and providing individuals with a secure and sustainable financial future,” the whitepaper said.

What is US 401(k)

It is an employer-sponsored retirement plan that allows employees to contribute pre-tax dollars, which may be matched by the employer. The contribution is pre tax and through the employer. There are no income limits but high-income individuals may face reduced or no deductibility.

The funds typically invested in mutual funds, index funds, or target-date funds. The EET - contributions are pre-tax, reducing taxable income. There is a penalty for withdrawal before age 59 1/2, unless separated from service or disabled.

The max employee contribution in US 401(k) is $23,500 in 2025, plus $7,500 catch-up contribution for those 50+. The maximum employee and employer contribution is $70,000. For portability, the employee may be able to roll over to the new employer's plan or IRA.

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Here is what AMFI’s chairman and chief executive says

According to Navneet Munot, Chairman, AMFI, this whitepaper is a reminder that retirement security must move from the periphery to the core of our financial priorities. It is a call for every working individual to start early, invest regularly and stay the course.

“The mutual fund industry, with its transparent and well-regulated framework, offers a ‘Sahi choice’ for building a robust retirement corpus through systematic, long-term investing. In doing so, these investments safeguard personal independence, while channeling savings into productive capital, which fuels India’s growth,” he said.

“Yet, retirement planning is not just a personal imperative — it’s a national one. When individuals invest with a longterm horizon, especially through instruments like mutual funds, their savings contribute to capital formation and economic development. These investments help fund infrastructure, businesses, and innovation, ultimately driving national growth and stability,” said Venkat Nageswar Chalasani, Chief Executive, AMFI.