Even if the life insurance sector has not received any of the relaxations it requested from the finance ministry, the elimination of the long-term capital gains tax (LTCG) with indexation advantages status on debt mutual funds may have levelled the playing field for long-term debt products. According to experts, this shift could put the insurance sector in a somewhat better position as consumers seeking tax-free returns on investments under Rs 5 lakh annually might select life insurance companies’ assured products.
The taxation rules surrounding financial instruments like debt mutual funds (MFs) significantly impact their attractiveness to investors. Recent changes to the taxation of debt MFs have made them less tax-efficient, potentially shifting investor interest toward alternatives like life insurance products. Here’s a closer look at how this dynamic
Historically, debt mutual funds were favored for their tax efficiency, particularly due to the indexation benefits available for long-term capital gains (LTCG). However, with recent policy updates:
- Indexation benefits have been removed for debt mutual funds held for over three years.
- Gains from debt MFs are now taxed as short-term capital gains, meaning they are added to the investor’s income and taxed at their marginal income tax rate.
This change increases the tax burden for high-income individuals and makes debt MFs less attractive compared to earlier years.