ULIPs - The Best Investment Option under LTCG Tax Regime

In Union Budget 2018, Finance Minister, Mr. Arun Jaitley proposed the reintroduction of LTCG (Long Term Capital Gains) Tax on equity-oriented mutual fund schemes. The imposition of 10% LTCG (long-term capital gains) tax on equity-oriented mutual funds seems to have changed the face of the Indian investment industry.

Soon after the announcement of LTCG taxes was made, a large number of insurers jumped to the scene and started projecting ULIPs as a better investment option under the LTCG tax regime. But are ULIPs actually the better investment option now?

Before we dig deeper and find out the answer, let’s understand everything about LTCG tax and its applicability.

LTCG Tax – Overview

LTCG or long-term capital gains refers to any profits made by an investor after holding shares for more than 1 year. Any long-term capital gain from the sale of equity shares, where the profit exceeds Rs.1Lakh, is subject to LTCG tax of 10%. Those making profits or earning below Rs.1 Lakh from the sale of equity shares are not liable to pay LTCG tax.

In 2004, the then government of India decided to replace the LTCG tax with Securities transaction tax (STT). However, LTCG tax has now been reintroduced and is to be charged with STT. At the time of buying or selling direct equity shares, STT of 0.1% is charged on investors. In addition, at the time of selling mutual fund units, STT of 0.001% is levied on the investors.

LTCG Tax – Grandfathering Clause

‘Grandfathering’ clause protects the gains made by existing investors against taxability before the LTCG tax comes into force. Under the ‘Grandfathering’ clause, any profits or gains made on the sales of shares or equity mutual funds till January 31st will not be taxed under LTCG. The Grandfathering clause will help existing investors ensure that their profits or gains made by the sale of equity shares or equity-oriented mutual fund units by January 31st are not taxed at 10%.

LTCG Tax - Applicability

LTCG will come into force from the 1st of April, 2018. So for any sale of equity holdings (held for over a year) made before March 31st will not be applicable for LTCG tax. In fact, the tax will be applicable to profits/gains exceeding Rs.1 Lakh in FY 2018-19. For example, if the gains/profits made by selling shares in the long-term is Rs.130000, LTCG tax will only apply on Rs.30000. 

Furthermore, there is no indexation benefit of LTCG tax. Indexation benefits help investors’ considerably lower the tax rate. However, Indexation benefits aren’t available on trading of equities. No wonder, more and more investors are now looking for investment options where they can earn attractive returns without having to worry about taxes. This is where ULIPs (Unit Linked Insurance Plans) have come to the rescue of investors.

In the light of LTCG taxes, ULIPs could prove to be the best investment alternative for earning attractive returns on investment by staying invested for a long term.

Why Should An Investor Choose ULIPs?

Given the imposition of LTCG taxes on the long-time holding and sale of equities/mutual fund units, investors are not likely to stay invested in mutual fund schemes for a long-term! After all, the impact of 10% LTCG tax on capital gains can cut down the profits substantially. On the other hand, long-term capital gains under ULIPs are tax-free. Quite expectedly, more and more equity investors are making a move towards ULIP investments. 

ULIPs are insurance cum investment products and come packed with the triple benefits of systematic investment, comprehensive life insurance coverage, and tax benefits. ULIPs offer a wide range of investment fund options to help investors invest their hard-earned money in the funds of their choice.

Being a quintessential insurance product, ULIPs allow investors to avail tax benefits on the payments made towards the premiums of the ULIP plans. This exemption is offered under Section 80C and is subject to a maximum deduction of Rs.150000. In addition, the maturity proceeds and death benefits offered by ULIPs are also tax-free. This exemption is allowed under Section 10(10D) of the Indian Income Tax Act.

In addition, some of the best ULIP plans also offer an in-built accidental death benefit that helps investors ensure an iron-clad and financially secure future for their loved ones. Under the accidental death benefit, nominees of the plan are paid out an additional accidental death sum assured in addition to the regular death benefit. The accidental death benefit is also tax exempt under Section 10(10D) of the Indian Income Tax Act. 

All in all, ULIP investments can help you create wealth, without having to worry about the LTCG tax. In addition, investors can also choose to invest in different ULIP products depending upon their future goals. Some such ULIP products where investors may invest their money include Child ULIP plans and Pension ULIP plans. 

Parting Thoughts!

ULIP investment comes packed with a host of advantages and benefits for investors looking to earn attractive returns without worrying about LTCG tax. Attractive features such as attractive features such as free fund switching options, free partial withdrawals, market-leading investment fund options, comprehensive life cover, etc. make it a complete investment package for both novice and seasoned investors looking to make capital gains from investments without being hit by LTCG tax.