Long Term Capital Gains Tax: Time for ULIPs to Rise and Shine

• Reduce taxable income by up to Rs. 1,50,000 deduction under section 80C**
• Convenient payment options - annual, half-yearly, quarterly or monthly premium payments
• Do more with plans that offer pure protection, retirement planning and investment options

As part of the Union Budget 2018, the Government of India announced that Long-Term Capital Gains (LTCG) tax will be re-introduced for mutual funds. Thus, individuals who earn a profit of over a lakh through sale of equity mutual funds and listed equity shares will have to pay a 10% tax. As a result of this move, unit-linked insurance plans or ULIPs, which combine the benefits of a life insurance cover and an investment instrument, have become a popular choice for investors off-late.

What are ULIPs?

Unit-linked insurance plans, also known as ULIPs, are a type of life insurance product that in addition to providing the life assured a risk cover against death also gives them the option to invest in mutual funds, bonds, or stocks, as per their appetite for risk. Thus, a part of the premium that is paid for a ULIP will go towards securing the life cover, while the remaining will be invested in funds as per the policyholder’s choice.

Benefits of Investing in ULIPs

1. Financial Security: Since ULIPs are a type of life insurance product, they guarantee the financial security of one’s dependents. Thus, in case the policyholder passes away during the policy term, a death benefit will be paid to the nominee. This payout can help secure the lives of the policyholder’s dependents.
2. Tax Benefits: In addition to serving as an effective investment instrument and providing financial security to the policyholder’s dependents, ULIPs also offer tax benefits. Thus, for premiums paid, you can avail tax benefits under Section 80C of the Income Tax Act. The payouts that you receive are also eligible for tax exemptions under Section 10(10D) of the Income Tax Act.
3. Flexibility: In the case of ULIPs, policyholders are given the option to invest in a particular fund as per their appetite for risk. Further, policyholders can also switch funds and/or redirect their premiums. Thus, policyholders are well within their rights to switch from an equity fund to a debt fund if the market-linked returns are not as expected.
4. Long-Term Investment Benefits: When it comes to investing in mutual funds or stocks, the returns are proportional to the investment period. Thus, if you wish to earn good returns, it is essential to stay invested for at least a few years. Since unit-linked insurance plans have a lock-in period of 5 years, they encourage long-term investment, and, thus, provide higher returns to the policyholder.
5. Enhanced Coverage from Riders: When you purchase a unit-linked insurance plan, you can also opt to purchase riders offered by the insurance provider. Some of the popular riders that are offered by insurance providers include the Waiver of Premium Rider, Accidental Death Benefit Rider, Accidental Death and Disability Benefit Rider, Critical Illness Rider, etc. In order to purchase a rider, the policy buyer will need to pay an additional premium for the rider at the time of purchasing the base policy. Thus, by purchasing riders offered by the insurance provider, you can avail enhanced protection.
6. Protection under the MWPA: Policy buyers can opt to purchase ULIPs under the Married Women’s Property Act or the MWPA. Purchasing a policy under the MWPA ensures that the payout that is provided by a life insurance policy upon the policyholder’s death is solely the property of the deceased individual’s wife and children. This ensures that creditors will not be able to claim any part of the payout. This is an especially beneficial option if you have liabilities like loans or debts.

Unit-linked insurance plans are an ideal choice for any individual looking for a life cover that will also serve as an investment tool. That being said, before deciding whether to invest in a mutual fund or a ULIP, make sure to do your due research and consider your financial needs, the requirements of your dependents, and your family’s future financial goals.