“It is proposed to provide that where the aggregate premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt. This will not affect the tax exemption provided to the amount received on the death of a person insured. It will also not affect insurance policies issued till 31st March, 2023,” said FM Nirmala Sitharaman.
The new rule will be applicable only on insurance products that are issued after April 1.
Mutual fund managers believe that the high net worth individuals can use debt mutual funds instead of these insurance products.
“In recent times, these income plans were preferred by investors based on guaranteed returns where annual tax free returns were approx. 6.50 to 7.00%. Many investors invested a reasonable amount of premium in these products. The new rule on tax on insurance maturity for premium above Rs 5 lakh will certainly have an impact on these high networth investors. This in a way does make mutual funds a better alternative where the return potential could be higher or equal but also has the advantage of liquidity and taxation,” says Harshad Chetanwala, Founder, MyWealthGrowth, a wealth management firm, based in Mumbai.
Mutual fund managers say that even though this makes debt MFs an option, it will not lead to huge exodus of funds from insurance. They believe that debt mutual funds are already a lucrative product for both retail investors and HNIs.
“Debt mutual funds were and continue to remain amongst the most competitive options on the debt side, in our view, with a wide range of options in terms of portfolio composition and maturity profile. They provide a better alignment of investment horizon and risk profile for investors. Debt mutual funds are already eligible for long term capital gain taxation benefits. Thus at the margin, some flow from the insurance segment may flow into debt mfs. More importantly though, this situation provides another occasion to investors to compare the real effective, net of all charges and long lock in period returns vs market related returns provided by debt mfs. Further, with a clear direction from the government to reduce tax rates and minimize exemptions, it should work in favor of a direct pass through vehicle like MF,” says Mahendra Jajoo, head-fixed income, Mirae Asset Mutual Fund.
