The Finance Ministry has made changes to the taxation of debt mutual funds; as opposed to the previous benefit of long-term capital gains with indexation for debt investments of more than three years, debt MFs are now subject to marginal tax rates across tenures.
Debt (ex-liquid) accounts for 19% of AUMs and 11% to 14% of revenues, which is bad for mutual funds, according to a report by international brokerage firm CLSA.
According to the brokerage, there doesn’t appear to be any change in the taxation proposed in the budget, and the status quo continues with life savings being taxed at the marginal rate (over 0.5 million in premiums), but tax arbitrage in favour of rival products like MFs is no longer an issue, which at these valuations is a slight plus for life insurers.
According to the brokerage, there doesn’t appear to be any change in the taxation proposed in the budget, and the status quo continues with life savings being taxed at the marginal rate (over 0.5 million in premiums), but tax arbitrage in favour of rival products like MFs is no longer an issue, which at these valuations is a slight plus for life insurers.
“NBFCs receive a significant share of their money from MFs; the percentage from banks will increase. Bank deposits and credit are somewhat favourable,” the paper stated.
The budget’s proposed tax reforms stay in place, therefore the status quo is maintained with returns on incremental premiums over Rs. 0.5 million being taxed at the individual tax rate. This has a marginally positive impact on life insurers.
- Although this will affect non-PAR savings sales compared to pre-budget levels, the new taxing for debt mutual funds now eliminates the tax arbitrage and puts all debt products on a par.
- As a result, life insurance went from being an excellent product before the budget (no tax on debt savings) to a subpar product after the budget (full tax on premiums beyond Rs. 0.5 million), and it is now neutral because alternate debt investments are also subject to marginal tax rates.
At these prices, we think this is only somewhat advantageous for life insurers. Connection between recent boost on cosy valuations and post-budget downgrading.
Little positive impact on banks: – Tax arbitrage vs bank deposits is no longer an issue following budget changes to insurance and amendment changes proposed for debt MFs.
Before, life savings products and debt MFs both benefited from LTCG of 20% with indexation and interest on bank accounts was taxed at the individual tax rate.
Although the market for bank deposits is 180 trillion rupees, compared to the total magnitude of debt held by MFs of 8 trillion rupees, this is generally beneficial for banks.
Effect on NBFCs: NBFCs and HFCs would be somewhat dependent on mutual fund funding. NBFCs and HFCs may need to rely more on bank funding rather than funding from MFs due to the possibility of fewer inflows in debt MFs.
The opinions and suggestions listed above are not Currency Veda’s rather, they represent the opinions of certain analysts or brokerage firms.
