The Union Budget 2018reintroduced the long-term capital gains (LTCG) tax on income from equity stocks and mutual fund investments. The imposition of 10 percent capital gains tax on profit exceeding Rs 1 lakh made from the sale of equity mutual fund schemes units held for over one year means that the benefits earned earlier for holding these units for a full year will now not be available. This also means that the taxpayers, salaried or non-salaried, looking to earn returns from the market will now have to face an additional tax burden.
However, if there a way out of getting the benefit of the appreciation from the market and yet not pay the LTCG tax? “The LTCG tax burden does not extend to unit-linked insurance plans (ULIPs). Customers holding on to ULIPs for the long run have earned 12-15 percent returns in the past. The emergence of low-cost ULIPs in the market coupled with the benefits of EEE (Exempt-Exempt-Exempt) tax structure has made them more appealing than equity linked savings scheme (ELSS),” said Santosh Agarwal- Head of Life Insurance, Policybazaar.com.
However, whether one chooses a ULIP or equity mutual funds, it is crucial that the selection should not be a knee-jerk reaction. ULIPs may be more tax efficient today, but there is no guarantee for the same to continue in the future. “Current equity investors are worrying that they don’t have an alternative to equity mutual funds to achieve long-term financial goals but ULIPs are the safe bet delivering the same benefits,” said Naval Goel, Founder & CEO, PolicyX.com
It is, therefore, a good option for investors to do a comparison between ULIPs and equity mutual funds. However, advisers suggest that both these instruments should be a part of one’s portfolio while developing one’s overall financial plan.
ULIPs comparison with tax-saving equity mutual fund
Under investments are eligible for 80C deductions, ULIPs and ELSS are competing for products. ULIPs, by not facing any long-term capital tax (unlike ELSS), could appear relatively attractive from a medium to long-term investment perspective. Taxation of insurance products is governed by section 10(10D) wherein income is tax-free at the hands of the investor at the time of withdrawal. ELSS, however, will now see taxes if the long-term capital gain is worth Rs 1 lakh.
Anil Rego, Founder, and CEO, Right Horizons says he would still recommend ELSs over ULIPs. “We would still recommend direct plans of ELSS funds as they are much better than most ULIPs in terms of liquidity, investment costs and also transparency. Besides, ULIPs have a 5 year lock-in period while ELSS has 3-year lock-in, which is among the lowest among all Section 80C eligible investments. ELSS is also more transparent in terms of accessing information related to investment style, portfolio composition and past performance data,” he said.
ULIPS comparison with equity mutual funds (non-tax saving funds)
Harsh Gahlaut, CEO – FinEdge told Moneycontrol pointed out that in comparison with mutual funds whose total expense ratios are tightly regulated, ULIP’s have a host of inbuilt charges that can affect your wealth creation from them in the long run. Additionally, Mutual Funds have a track record of outperforming similar category ULIP funds over medium to long-term timeframes.
“Post the budget, ULIP maturity proceeds may have become more tax-efficient than equity mutual funds, but switching from mutual funds to ULIPs as a result of this change would be a ‘penny wise, pound foolish’ move. In the long run, you are likely to create much more wealth by investing in high-quality mutual funds with long-term track records of performance,” added Gahlaut.
Buying ULIPs allows one to invest in both equity and debt depending on the risk appetite without the tax burden. However, ULIPs are a mix of investment and insurance. ELSS, on the other hand, is only a pure investment. Therefore, it is essential that investors should consider both the product cost, potential returns and goals before selecting a product. Merely taking investment decisions based on tax advantage or disadvantage is being short-sighted. Always understand the product construct before taking a final call.
Source:-moneycontrol
