The new Budget announced on 1st February re-introduced taxes on Long-Term Capital Gains (LTCG). Well, a move that’s bound to be a game changer for investors. For those of who don’t understand the significance and potential repercussions of this measure, let us break it down.
Hitherto, LTCG arising from the sale of equity-oriented mutual funds and listed equity shares were entirely tax-exempted. However, under the new tax regime, LTCG on profits exceeding Rs. 1 lakh will be taxed at 10%. As a result of this, many investors are will now need to look at more favourable investment alternatives.
Incidentally, ULIP or United Linked Insurance Plan is one such investment option that has been regaining popularity of late. In fact, ULIP has emerged as one of the strongest contributors to the life insurance sector in the last few years. The LTCG tax will only increase its popularity, as ULIPs not only provide impressive returns, but also receive considerable tax exemptions.
This growing acceptance of ULIPs is due to its many attractive savings features. We have mentioned some of the key benefits of ULIPs below, so that you can gain some insight into the many pros of ULIPs right here:
- ULIPs have the edge of Tax Exemptions
Being an insurance as well as investment option, the maturity benefits and the partial withdrawals are not taxed. Additionally, even the premiums that investors pay are eligible for tax deductions under Section 80C of the Income Tax Act. The icing on the cake is that the grandfathering clause, which allows old rules to apply for existing situations, applies to the tax deductions of ULIPs. Therefore, even if there are further changes made to the tax laws, ULIP investors will likely remain unaffected.
- Easy Shifts from Equity to Debt
Mutual Funds often offer the facility to switch between equity and debt schemes, but these shifts come with a break in the investment time. ULIPs, on the other hand, offer its investors a flexible transition from equity to debt. Thus, investors do not have to stay invested in equity if the market begins to decline, nor do they have to incur any tax liability, as they would under the LTCG.
- Encourages Longer Investments for Better Returns
The golden rule of investment is that the longer the investment, the higher the returns. Yet, according to Assocham’s report of 2015, most mutual-fund investors choose to stay invested for less than 2 years. This is more harmful than it appears, as most mutual fund holdings have a pay-out option when customers transfer. As a result of this, chances of any long-term growth are wiped out. This is where ULIPs have the advantage, as they have a minimum lock-in period of 5 years, thus encouraging long-term savings.
To give you an example, you can invest in ULIPs like Bajaj Allianz Like Future Gain and choose funds like Bajaj Allianz Life Accelerator Mid-Cap Fund for low risk returns. As the graph below illustrates, your rate of returns rises significantly as the time invested increases.
- Married Women’s Property Act
This underrated but important provision that gives a woman inalienable rights over the benefits of a life insurance policy, wherein her husband has named her a beneficiary, only applies to ULIPs. No Mutual Funds can provide this essential benefit. Who knows what the future holds and there are many instances when money has weakened the bond of blood. Thus, a ULIP where they’re named a beneficiary will go a long way in providing some mental strength in case of a dispute.
- Financial Security
Every investor’s biggest goal when saving is to be financially secure, so they are well-equipped to face any financial adversity. The life cover that a ULIP provides ensures that its customers have that security. In fact, once the 5 years’ lock-in period is over, the investor is at complete liberty to make a partial withdrawal without incurring any tax liability on it. Now, that the freedom that Mutual Fund, unfortunately, will no longer be able to provide.
In A Nutshell
Mutual Funds are and have always been a very popular avenue of investment and while the LTCG tax will certainly hamper their momentum, they will continue to be an important part of an investor’s financial portfolio. That being said, it’s ULIPs’ time to shine and dominate the market as long-term, goal-oriented plans that take care of your insurance and investment needs.
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