The Budget 2018 bowled quite the bouncer to the investment world with its LTCG tax notification. Short for Long Term Capital Gains tax, it means any investor who held an equity fund in his/her portfolio for over 12 months will have to pay a 10% tax on the fund’s returns. While this tax applied to equity funds, ULIP plans survived this tax.
However post the budget, a debate rose and even now, nearly a year later, it rages on. Should you go for a ULIP plan or a mutual fund? All this, thanks to the LTCG tax notification. While his notification has indeed helped ULIPs receive the much-needed exposure, especially among young investors, has it really created an advantage for it? Well, that’s the question everybody has on their minds. Here’s a short but brief attempt to answer it.
Let’s have a look at what a ULIP plan is all about…
Unit Linked Insurance Plans are a life insurance product. They let you invest your money into various investment avenues such as stocks, bonds, or mutual funds and also provide you a life insurance cover. Unlike other investment plans, ULIPs benefits include a life insurance cover and market-linked investments. A portion of the premium paid towards ULIP plans is utilised for life insurance, while the other forms the investment corpus.
Now, here comes the interesting part. Most investors, whether young and old, novice and experienced, think twice or thrice before zeroing down on ULIP plans or mutual funds. In a ULIP, you bear some minimal costs at the start, which include:
- Premium allocation charge
- Mortality charge
- Fund management charge
- Fund switching charge
- Policy administration charge
- Partial withdrawal charge
Though, initially these charges might discourage you, as an investor, you should not give up on ULIPs so easily.
When you invest in a product, you must do so keeping a goal in mind, preferably a long-term one. Unit linked insurance plans help you reach that goal. They come with a lock-in period of five years which is excellent for wealth creation and any pre-withdrawals attract a charge; a smart deterrent.
When you invest in it for the long run, you are bound to enjoy good returns thanks to the power of compounding. Your returns by the way, does not attract the LTCG tax as mutual funds do. So, your money is not taxed and remains with you. Also there is no short-term capital gains tax too, under Section 10(10D) of the Income Tax Act, 1961 because ULIPs are an insurance product. That’s a double benefit not many investment products enjoy.
Adding to all this is the insurance component of ULIP plans, if something were to happen to you, your nominee would receive a hefty amount which would secure their financial future.
So, does the LTCG tax on equity funds help ULIPs? Yes, it does. The tax brought an investment plan back from the Shadows, and into the limelight again. Today, investors are beginning to see it as a smart plan for protection and investment in the long-term.
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