Ulips Gives Better Tax Benefits than Mutual Funds

 

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For long Ulips were hated among all life insurance products. Life  Insurance agents mis-sold the Ulips to such an extent that they threatened the very existence of the Life insurance sector.

Reforms were introduced by IRDA in September 2010 to improve Ulips and save them. But the damage had been done.

Many investors are still reluctant to invest in Ulips due to the bad experience they had with them.

Ulips have reduced their charges particularly premium allocation charges which were over 30% of the premiums you paid. They are now around 7-8% of the premiums you pay.

Though mutual funds have a much lesser charge (entry and exit loads) Ulips too have become cheaper.

Where Ulips scores over mutual funds are tax benefits….

How are mutual funds taxed?

If you invest in an equity mutual fund for a time period less than a year and you make a profit, the gains are called short term capital gains.

These are taxed at 15% .If you stay invested in the equity mutual fund for over a year, your gains are long term capital gains and there is no tax on this.

If you invest in a debt mutual fund for a time period less than 3 years the gains you get are called short term capital gains. 

These gains are added to your taxable salary, and you are taxed as per the income tax slab you fall under.

If you invest in a debt mutual fund for a time period more than 3 years the gains you get are called long term capital gains. Long term capital gains are taxed at 20% with indexation.

What about the taxation of Ulips: 

Ulips are of different types:

• Equity
• Debt
• Mix (Equity + debt)

You can easily switch between Ulips. You can switch from an equity ulip to a debt ulip and vice versa. You can do the same in mutual funds also.

The money you invest in a Ulip is tax deductible up to INR 1.5 Lakhs under Section 80 C of the income tax act.

The maturity benefits are tax free under Section 10(10d). This means you don’t have to pay tax when you switch between equity Ulips to debt Ulips.

If you switch between an equity mutual fund to a debt mutual fund and vice versa you would have to pay tax on your short term and long term capital gains as applicable. There are no tax benefits on mutual funds baring ELSS.

There is no tax charged on the gains you make by switching from a debt to an equity ulip and vice versa.

Switching of funds is very useful for asset allocation .If the stock market’s rise your equity ulip may go up in value. You can shift a part of it to debt and balance your portfolio. This will protect its value if the markets crash.

If the markets crash you can shift part of your money from the debt Ulip to the equity Ulip and when the markets rise you could get a profit.

If you are a savvy investor who makes use of the switching options then Ulip gives you tax benefits.

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