- Date : 27/06/2023
- Read: 3 mins
As debt mutual funds lose their tax advantage, we look at ULIP as an alternative, as it provides life insurance in addition to tax savings.
ULIPs are popular insurance cum investment products.
Investors are looking for alternatives after debt mutual funds lost their long-term capital gain tax advantage.
ULIP can be a good alternative for small investors.
Unit Linked Insurance Plan (ULIP) funds combine insurance and investment, allowing you to invest in equity, debt or hybrid units while getting a life cover. The recent decision to change the taxation rules on debt mutual funds has given renewed importance to unit linked insurance funds.
Debt Mutual Funds Taxation Changes
Long-term capital gain on debt mutual funds was taxed at 20% after indexation. By inflating the purchase price, indexation lowers the capital gain amount. Therefore, debt mutual funds used to be tax-beneficial for anyone falling in the 20% tax bracket or higher. However, capital gains on debt mutual funds bought from this financial year onwards will simply be added to your income tax slab.
Taxation on ULIPs
ULIPs have a lock-in period and have tax benefits. This makes them a popular form of investment for meeting specific financial goals like children’s education, retirement, marriage, etc.
The premium paid on ULIPs is eligible for tax deduction under section 80C. You can claim a deduction of up to Rs. 1.5 lakhs in a financial year.
The maturity proceeds received from ULIPs were exempt from tax under section 10 (10D). However, this exemption was withdrawn from high-value ULIPs whose annual premium exceeded Rs. 2.5 lakhs. In the case of multiple ULIP funds, the aggregate of all the funds was considered and not individually. ULIPs bought before 1 February 2021 remain exempt from tax.
Should You Invest in ULIPs?
ULIP debt funds can be examined as a viable alternative to debt mutual funds.
Of all the fixed-income investments, ULIP debt funds are one of the most tax-friendly options while offering decent risk-adjusted returns.
ULIP debt funds are flexible as investors can switch between funds, often free of charge.
With the cap on the premium amount, both under section 80C and 10 (10D), ULIP will be more beneficial for small investors.
Five-year rolling returns of pure life insurance-based, top performing ULIP debt funds (with a track record of 10 or more years) were similar to debt mutual funds.
The conditional tax exemption on maturity proceeds and 80C eligibility on investments make ULIPs a good alternative to debt mutual funds. However, it is the affluent class with high tax slabs that has lost out on the tax benefits that debt funds used to offer. These investors don’t stand to gain much from ULIPs either, given the cap on tax benefits.
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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.