LTCG tax in ULIP – how does it work?
A Unit Linked Insurance Plan (ULIP) might have been in the market for a long time along with other traditional investment products such as Mutual Funds, Public Provident Fund, Fixed Deposits, and so on. However, many of you might have preferred to stay away from a ULIP investment due to its high costs and low returns. Due to its low credibility in the market, a ULIP policy re-emerged in the Indian market with new rules after the budget announcement of the Long Term Capital Gains (LTCG) tax.
After the Union Budget announcement, a ULIP investment might have become a popular choice for a long-term investment. A ULIP policy is a mix of insurance and investment under a single integrated plan. While the investment component can be market-linked, the ULIP insurance might have specific income-tax rules. Therefore, let’s understand what an LTGC tax is in detail:
When you invest in a market-linked product, you should pay an LTCG tax over the returns you earn from your investments. An LTCG tax is applicable on all the equity-linked investment products like Mutual Funds (MF). Under MFs, the LTCG tax can be applicable approximately at 10.4%. For instance, if you have a balanced scheme for short-term (less than a year), the capital gains can be taxed at 15%. Hence, you might choose a ULIP policy due to its financial viability over MFs.
Under a ULIP policy, your family members can receive a death benefit in your absence. Usually, your loved ones can obtain a tax-free death benefit according to Section 10(10D). The absence of the LTCG tax under a ULIP plan can turn it into a tax-efficient investment product.
Apart from ULIP tax benefits, a ULIP policy comprises of different features. Therefore, let’s go through these four essential features of a ULIP policy:
- Charges
Previously, a ULIP policy was typically known for high charges in the Indian market. However, it is no longer the case today since you can purchase a ULIP investment plan at an affordable price. Moreover, you can find the most common ULIP charges given below:
- Policy administration charge
- Fund administration charge
- Premium allocation charge
- Mortality charge
- Funds
Under a ULIP policy, you can pick between equity funds and debt funds. While an equity fund can garner high returns, a debt fund can provide you with low returns. However, you should choose these funds based on your risk appetite.
- Switching
A switching feature can allow you to secure your invested capital from the volatility of the market. When you invest in a ULIP plan, you can shift from one fund to another to protect your money. However, before switching, you should consider the market condition and make a switch accordingly. For instance, you should switch to debt funds when the market is down, and shift to equity funds when the market bounces back with better returns.
- Lock-in period
A ULIP policy can have a lock-in period of five years. Due to the longer lock-in period, you can accumulate more funds over the tenure of the ULIP policy. However, you should pay the premiums regularly until the completion of the lock-in period. As stated in the Section 80C of the Income Tax Act, 1961, you can claim a tax deduction up to Rs. 1,50,000 on your taxable income.
To sum up, a ULIP plan can offer you with dual benefits in terms of taxes as well as investment. While it is a combination of investment and insurance, you can claim deduction on your premiums as well as maturity proceeds. In addition to this, you can grow your corpus and reap the tax benefits from a ULIP investment. Consult a professional to understand what is ULIP plan is before selecting a plan for you to fulfil your long-term goals.
