Debt mutual funds are now taxed at the marginal tax rate throughout their tenure, as opposed to earlier gains of long-term capital gains with indexation for debt investments lasting more than three years. This amendment to debt mutual fund taxation was made by the Finance Ministry.
According to a report from global brokerage firm CLSA, this is bad news for mutual funds because debt (in the form of cash) makes up 19% of AUM and 11% to 14% of revenue.
According to the brokerage, there appears to be no change in the proposed taxation for life insurers, and life savings are still taxed at the marginal tax rate. 0.5 million premium), but tax arbitrage has been eliminated in favor of competing products like mutual funds (MFs), which is a modest benefit for life insurers at these valuations.
A significant portion of NBFC funding comes from MFs; the proportion of funding coming from banks will rise. Insignificantly sure for bank credit/stores,” the note said.
Positive Margin Impact on Life Insurers:
The tax changes proposed in the Budget have not been modified, so incremental premium returns exceeding Rs. 0.5 million will continue to be taxed at the individual tax rate.
The change in taxation for debt mutual funds now bridges tax arbitrage and brings all debt products into line, despite the fact that this will have an effect on non-cross savings sales compared to pre-Budget levels.
As a result, life insurance policies went from being a better option prior to the budget (when loan savings were tax-free) to a worse option after the budget (when premiums cost more than Rs. 0.5 million), and it is now neutral due to the fact that marginal tax is imposed at the rate of tax even on investments in alternative loans.
We believe life insurers will benefit moderately from these valuations. Link between the recent upgrade on comfortable valuations and the recent budget cutback.
Small Benefits for Banks from the Impact:
After the budget changes for insurance and the proposed revision changes for debt MFs, tax arbitrage against bank deposits is over.
In the past, interest on bank deposits was taxed at the individual tax rate, and debt mutual funds received indexation and tax-free returns on life savings products in addition to 20% LTCG.
The market size of bank deposits is 180 trillion rupees, compared to the total loan MF size of 8 trillion rupees, so the volume may not be significant, but the margin is positive for banks.
Result for NBFCs:
Mutual funds will continue to be a significant source of funding for NBFCs and HFCs. NBFCs and HFCs may have to rely more heavily on funding from MFs rather than bank funding due to possible lower inflows into debt MFs.
The opinions and suggestions presented above are those of individual analysts or brokerage firms and not those of Mint,
