Salaried employees may soon get an option to invest in mutual funds directly through salary deductions, similar to provident fund (PF) contributions, if a new proposal floated by the Securities and Exchange Board of India (SEBI) is implemented.
SEBI has proposed allowing payroll-based systematic investment plans (SIPs) under its new third-party payment framework, enabling employers to invest a portion of an employee’s salary in mutual funds with the employee’s consent.
Market experts say the move could encourage disciplined investing and bring more first-time investors into mutual funds, though operational and compliance-related challenges remain.
What is SEBI proposing?
At present, mutual fund investments generally require the investor’s bank account and payment source to match the investment account. SEBI’s consultation paper proposes allowing third-party payments in specific situations with appropriate safeguards.
This could enable employers to deduct a fixed amount from an employee’s salary and invest it directly into mutual funds selected under a payroll SIP arrangement. The proposal is currently open for public feedback and has not yet been implemented.
How would a payroll SIP work?
Under a payroll SIP, a fixed portion of an employee’s salary would be automatically deducted every month and invested in a mutual fund scheme. The process would be similar to existing deductions for provident fund contributions or other salary-related deductions.
According to experts, such a system could help employees develop disciplined investing habits and encourage long-term wealth creation. Moneyfront Chief Executive Officer Mohit Gang said the proposal could make investing more convenient for employees who have not yet started investing through SIPs.
“Just like salary is credited every month, a fixed amount can be automatically invested in a mutual fund. This can make investing easier for a large section of people who have not yet begun their investment journey,” Gang said.
Why do experts see potential benefits?
Experts say many individuals intend to invest but often postpone taking action. Complete Circle Capital Senior Partner Vikas Puri said payroll SIPs could help bridge this gap.
“There are many people who plan to start investing but keep delaying the decision. Automatic salary deductions can encourage them to begin investing and build wealth over time,” Puri said.
He added that the proposal aligns with broader efforts to channel household savings into productive financial assets.
According to Puri, employees may also feel more comfortable investing through a structured workplace mechanism rather than selecting products entirely on their own.
Will payroll SIPs offer tax benefits?
One of the biggest questions for salaried employees is whether payroll SIPs will provide tax benefits similar to the Employees’ Provident Fund (EPF), Public Provident Fund (PPF) or National Pension System (NPS).
Experts said the current consultation paper does not mention any additional tax benefits for payroll SIP investments. Puri said tax incentives could become an important factor if policymakers want wider adoption of the system.
“The current proposal focuses on investment convenience. There is no specific provision for additional tax benefits at this stage,” he said. As a result, payroll SIPs would primarily serve as an investment and wealth-creation tool rather than a tax-saving instrument unless future changes are introduced.
Which companies can offer payroll SIPs?
According to the proposal, only listed companies registered with the Employees’ Provident Fund Organisation (EPFO) would be eligible to offer payroll SIP arrangements. Experts said this requirement is intended to ensure stronger governance, transparency and compliance standards.
Gang noted that the eligibility conditions significantly narrow the universe of participating companies. “Listed companies generally have stronger governance frameworks and regulatory oversight. That can provide additional safeguards for employees,” he said. Employees would be able to voluntarily opt into the scheme and would also have the option to exit.
What are the challenges?
While experts welcomed the proposal, they said several operational questions remain unanswered. Gang said one key challenge would be investor education and communication during market volatility.
“If markets decline sharply and employees see losses in their portfolios, who will explain the risks and long-term nature of investing to them?” he asked. He also pointed to issues such as risk profiling, scheme selection, investor suitability and compliance responsibilities.
According to experts, companies may need clear guidelines on how mutual fund options will be selected and presented to employees.
Is the proposal safe?
The proposal has also raised questions about investor protection and anti-money laundering safeguards. Gang noted that India’s existing Know Your Customer (KYC) and anti-money laundering rules have traditionally discouraged third-party payments because of concerns about the source of funds.
“Third-party payments have always been a sensitive area from a compliance perspective. Strong safeguards will be necessary,” he said. Puri said limiting the facility to listed and EPFO-registered companies could help reduce risks.
“Listed companies operate under stricter disclosure and governance standards. That improves transparency and oversight,” he said. However, both experts stressed that the final framework would need robust compliance requirements before implementation.
Other proposed uses of third-party payments
SEBI’s proposal also discusses allowing mutual fund units to be used in certain other situations, including payments to distributors and donations. However, experts expressed reservations about some of these provisions.
Gang questioned whether mutual fund distributors would prefer receiving commissions in the form of mutual fund units rather than cash payments. “Investment professionals already understand asset allocation and liquidity requirements. It is not clear whether receiving mutual fund units instead of cash would be attractive for them,” he said.
On donations, Puri said non-government organisations and charitable institutions often require immediate cash for daily operations. “Mutual fund units may create additional administrative and tax-related complexities for organisations that need cash resources to run their activities,” he said.
The road ahead
SEBI’s proposal is currently at the consultation stage, and stakeholders have been invited to submit their views before any final decision is taken. Experts broadly agree that payroll SIPs have the potential to increase mutual fund participation and promote long-term investing among salaried individuals.
However, they also believe that issues related to compliance, investor protection, risk communication and operational execution will need careful consideration before the framework is rolled out.
For now, payroll SIPs remain a proposal, but if implemented effectively, they could become a new avenue for encouraging disciplined investing among Indian employees.
