Private provident funds and superannuation funds, which were last year allowed to channelise a larger chunk of their corpus into equity, will not attract income tax following a change in tax rules. The tax-free status would allow more retirement savings to flow into shares.

The Central Board of Direct Taxes (CBDT) has issued a notification, aligning the investment pattern prescribed in its rules with the new one given by the Department of Economic Affairs, to allow these funds equity investments tax-free status.

The DEA, under the finance ministry, had announced the new investment formula for these funds in August 2008, permitting them to invest up to 15% of their corpus in the stock market instead of the earlier 5%.

The new investment pattern comes into effect from April 1, 2009. Therefore, aligning the CBDT investment pattern with the one prescribed by the DEA was crucial for these entities to retain their tax-free status.

Income-Tax Rule 67 prescribes an investment pattern for private provident funds and superannuation funds which must be followed to avail tax benefits. Income earned on investments not in line with the pattern prescribed by the tax body attracts tax.

According to the new pattern, equity investments can be made in shares of companies on which derivatives are available on BSE and NSE. The funds would also be able to channelise up to 55% of their funds in central and state government securities and units of mutual funds investing in such securities.

The new pattern also allows these entities to park up to 40% of their funds in debt securities with maturity of not less than three years issued by companies, banks and public financial institutions, term deposits of scheduled commercial banks and rupee bonds having an outstanding maturity of at least three years issued by multilateral institutions such as the International Bank for Reconstruction and Development, International Finance Corporation and the Asian Development Bank.

Investment in money market mutual funds has been capped at 5% of the total corpus.