Tax regimes are the nightmares of every investor, at the time of an investment in any plan. While the introduction of Long term Capital Gains (LTCG) is a game changer for Unit Linked Insurance Plan (ULIP), the LTCG on mutual funds fails to impress a majority of investors. So if you’re wondering how LTCG affects the investment on ULIPs and MFs, go through the following in order to make informed decisions. Take a look:

What is Long Term Capital Gains (LTCG) Tax?

Before the Union Budget, LTCG was absolutely tax-free for the investors. In order to ensure long term investments and participation of the investors in equity markets, LTCG was abolished in the late 2000s. However, after the budget, the investors are liable to pay 10% tax on the long term capital gains, if the profit exceeds up to Rs. 1 Lakhs from the date of acquisition.

A Long Term Capital Gains (LTCG) tax is a type of taxing system which is levied on profits which are typically generated from assets like shares, real estate, and so forth. It can also be levied on share oriented products which are held for at least a period of a year from the date of its acquisition. In order to calculate LTCG, deduct the acquisition cost from the entire sum of consideration on transfer of the long term capital asset.

Effects of LTCG on ULIPs and MFs:

  1. Effects on taxes

Even before the introduction of LTCG, ULIPs allow the tax benefits on the maturity amount as well as the premiums of the policy. The insurance companies have highlighted that the gains from balanced and equity funds are 10% taxable but the income from a ULIP Policy will be tax-free.

  1. Effects on costs

While the investment in MFs is cheap, the new-age ULIPs promotes low costs. Post the introduction of LTCG, the cost structure of these new ULIPs is economical enough that it can easily compete with the low prices of the mutual funds. Certain ULIPs might not have the fund management and policy administration charges incurred on them. In case the insurance companies let go of the mortality charges, the overall ULIP charges will be less than 1.5%. Even if the mortality charges are added, it will eventually reduce the net investment of the policyholder.

  1. Effects on liquidity

While ULIPs have a lock-in period of 5 years, an investor can exit mutual funds anytime he wants. In order to meet your long term financial goals, it is important to have a long term investment plan. If you stay invested in a ULIP Policy until its maturity period, there is more scope for the growth of the funds. The longer you stay invested, the higher is your accumulation of funds. Besides, ULIPs allows partial withdrawal in case you want to surrender the policy.

Now that you know how LTCG affect the ULIP Policies as well as mutual funds, simultaneously, which one are you opting for? While mutual funds are a traditional means of investment, the new-age ULIPs have gained mass popularity due to its cost-effectiveness. Therefore, an investment in a ULIP is worth a try since you’ll end up saving more because of its low charges and high gains. Additionally, the tax saving quality of the new age ULIPs is something that has attracted tons of investors. Research carefully to find the best ULIP plan in India for yourself.

Long-Term Capital Gains – How It Affects ULIPs and Mutual Funds

Post navigation


Leave a Reply

Your email address will not be published. Required fields are marked *

+ eleven = 21