Finance Bill 2023 has made major changes to debt mutual funds, which relates to exclusion of long-term capital gains and indexation benefit. This move looks disappointing for the mutual fund industry, however it's a blessing in disguise for life insurance companies. Industry experts say that the announcement can make long-term savings life insurance products more attractive than debt fund schemes again.

Taking away indexation benefits from debt mutual fund schemes will improve the internal rate of return for life insurance companies on long term savings policies, where taxation was announced on a cumulative premium of more than Rs 5 lakh. The IRR is about 6.5-7 percent, experts believe.

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The IRR for debt mutual fund schemes is about 100 basis points (bps) lower than that. But now with indexation benefits not being available with both industries, this arbitrage of 100 bps of incremental IRR still remains with long term life insurance policies. This will make these products more attractive than long term debt mutual fund schemes.

There is also disadvantage on reinvestment side.

Long term savings life insurance policies are generally about 10 to 15 years long products, where the taxation which the government has announced in the budget has to be paid at the time of maturity, which is at the end of 10-15 years.

Budget 2023-2024 had earlier proposed that life insurance policies with a premium exceeding Rs 5 lakh annually will be taxed.

On the other hand, investors will have to pay taxation twice or thrice in case of debt fund reinvestments in duration of 10/15 years, which is not something that would happen on the life insurance side.

On top of these, there is no tax on life insurance policies when the premium is under Rs 5 lakh. Whereas on the debt mutual fund side, irrespective of the amount which is invested, there will be taxation and there won't be any indexation benefit.

Also Read | Finance Bill proposal: Pension fund investments to be exempt from taxation under InvITs

Some numbers in detail

For the life insurance space, investors now may prefer life insurance products over debt mutual funds if their annual investment is up to Rs 5 lakh as that is currently under the tax free bracket.

When one looks at the IRR, which is the returns over the 10 year period, the non-par guarantee savings link products, which was under the limelight post the budget announcement, will generate a return of 6.5-7 percent. And debt mutual funds, post this Finance Bill announcement, will generate a return of 5.5-6 percent considering a marginal tax rate of 30 percent.

Post budget, analysts estimated that there will be an 8-10 percent loss in APE from April 1 and also the APE for March will grow at a rate of 15-40 percent as opposed to 5-10 percent last March.

Now, post the finance bill announcements, analysts estimates that there will be a lower loss of APE in second half of FY24.

They may see a pickup in sales in the ULIP products and also within that SBI Life may do better as they have a higher exposure of debt oriented ULIPs.

The valuations of the life insurance players

The life insurance players have seen a significant corrections where HDFC Life has seen the most correction from 3.8 times price by embedded value to 2.2 times on an FY24 basis followed by Max Financials and ICICI Pru.

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(Edited by : Anshul)

First Published:Mar 24, 2023 3:43 PM IST