The Securities and Exchange Board of India (SEBI) has proposed a new framework that could allow salaried employees to invest in mutual funds directly through payroll deductions while also enabling investors to donate part of their investments or returns to approved non-governmental organisations (NGOs). The proposal is part of a consultation paper aimed at relaxing restrictions on “third-party payments” in mutual funds under carefully regulated conditions.

At present, mutual fund investments in India must be made only through the investor’s own bank account using RBI-authorised payment systems or SEBI-recognised platforms. These rules were introduced mainly to prevent money laundering, fraud, and terror financing. SEBI now believes there may be genuine situations where limited third-party payments can be allowed without compromising investor safety.

One of the key proposals is a payroll-linked investment system similar to existing deductions for EPF and NPS. Under this mechanism, employers could deduct a chosen amount from an employee’s salary and invest it into mutual fund schemes selected by the employee. The facility would remain voluntary, and all payouts or redemption proceeds would continue to go directly to the employee’s own bank account.

SEBI has suggested that the facility may initially be available to listed companies, EPFO-registered firms, and asset management companies. Experts believe this could encourage disciplined investing among salaried individuals and expand mutual fund participation beyond metro cities. Legal and financial experts also say the proposal may particularly help workers who are less familiar with digital investing platforms and prefer employer-assisted financial products.

However, several concerns have also been raised. Specialists have pointed out that labour laws may need amendments because wage deductions are currently allowed only in specified circumstances under the Code on Wages, 2019. Tax experts have also highlighted the need for clarity on TDS treatment if a portion of salary is directly routed into mutual funds before reaching the employee’s account.

Another important aspect of the proposal involves donations through mutual funds. Investors may be allowed to direct part of their subscription amount or investment returns toward social causes and NGOs registered on the Social Stock Exchange. According to SEBI, this could simplify charitable giving by helping investors identify credible organisations through an established regulatory structure.

Experts believe the move could reduce the burden on donors to independently verify NGOs while also lowering donor acquisition costs for charitable organisations. Still, tax and compliance issues remain a concern, especially regarding proof required for deductions under Section 80G of the Income Tax Act.

To address risks, SEBI has proposed strict safeguards including strong KYC norms, electronic fund trails, relationship verification between payer and beneficiary, and compliance with anti-money laundering laws. The regulator has invited public comments on the consultation paper until 10 June before taking a final decision.