Budget Impact: Growth of Mutual Funds, Insurance adversely Impacted

Union Budget of FY 2020-21 presented new Income Tax slabs and provision and changed the onus of taxation from corporate to individual tax payers both of these moves are going to negatively impact Mutual Funds as well as Health & Life Insurers.

Finance minister’s announcement to simplify Income Tax filings by introducing new Tax Slabs which forgoes existing exemptions provided for tax payers while lowering the overall tax rate has done away with the need for making Mutual Fund investments through ELSS schemes. A few of the investors which are less enthused towards making such investments, this will have baring impact not only on growth of Mutual Funds but subsequent flow to the capital markets.

ELSS schemes was one of the preferred investment tools, Asset Under Management (AUM) of ELSS had grown at CAGR of 19.4% during 2015-19 period and by end of 2019 AUM under ELSS accounted for Rs 99.8K crore, this may witness slight slowdown in the coming years. Dividend Distribution Tax modifications by government will also bearing on the Dividend schemes of ELSS mutual funds, they will go under migration as investors will like to tax outcome arising out of dividend payout. Some of the investors may choose to park their entire portfolio of mutual funds in growth scheme and may prefer to move out.

Health and Life Insurance companies are other major victims of this change in Income Tax regime as new tax slabs have made it optional for the salaried people to choose such instruments. Health insurance are likely to face major hurdle in future growth as people with corporate insurance schemes may not prefer to buy another health insurance without any tax benefit. Individuals between age group of 20 to 35 years may postpone the purchase of such health insurance schemes. This would impact revenue growth of all players including HDFC Life, ICICI Prudential and SBI Life, who may find it tough to get buyers from certain demography going forward.