Budget ideas 2020: Need to bring in tax parity between investments in MFs and Ulips

Updated: January 27, 2020 12:59:09 AM

Budget 2020 India: Hence it would not be out of place to compare mutual funds and insurance products like Ulip.

Budget 2020: In fact, within the broad parameters a policy holder can even increase or decrease allocation even among equity and debt.

By Sunil Gidwani 

Union Budget 2020 India: Life insurance industry is not just about protection of life but perceived by many as an investment product and hence more than 50% of the life insurance industry’s business comprise unit-linked insurance policy (Ulips). While the purpose of an insurance product may be completely different, Ulip has all the elements of an investment product.
The insurance business is managing pool of funds and making prudent investments. Hence it would not be out of place to compare mutual funds and insurance products like Ulip. But when it comes to taxation, there is much difference between mutual fund products and insurance products.

Long-term capital gains in MFs

Long-term gains from all categories of mutual funds including equity funds are now taxable whereas the maturity proceeds of Ulips being categories as insurance proceeds are exempt even if partially withdrawn and there are no other adverse consequences if withdrawn after a lock-in.

Again, securities transaction tax is payable on redemption of equity fund and on every trade of ETFs on a stock exchange. ULIP redemption does not attract such tax.

A mutual fund scheme could be categorised as equity, debt, hybrid, etc., and within such there could be schemes based on a specific strategy or theme like large-caps, multi-cap, small-cap. Within each of these schemes, an investor can go for dividend payout or a dividend reinvestment plan. Similarly, one can invest directly in a mutual fundor invest through an agent or distributor thereby invest in a Regular plan. In each of these options, the price the investor pays at the current net asset value or NAV is different. And hence a switch from one plan to another within the same scheme means different units and quantity being issued to the investor. The switch does not result in any cash flow for the investor but is regarded as taxable transfer resulting in liability to pay capital gains tax.

No capital gains in Ulip

For Ulip, which is very similar to a hybrid or balanced fund with agreed percentage allocation to debt and equity, the policy holder or ‘investor’ simply can move from one option to another. In fact, within the broad parameters a policy holder can even increase or decrease allocation even among equity and debt. Such change of asset allocation does not result in any capital gains tax. The reason is that insurance companies do not issue any units to the investor and the calculations in terms of value of a policyholder’s investments are all done at the backend.

Products like Ulips already have an added advantage of a tax deduction under Section 80C for payer at the time of investment, the discrimination during the lifetime of the investment also acts as a major deterrent and a cash flow issue due to capital gains tax treatment.

Currently, the law provides for exemption from capital gains tax for mutual fund investors only where there is consolidation or one or more schemes or plans.

One of the measures to increase participation in capital markets that the government should consider is to bring parity in tax treatment of investments in mutual funds and Ulips.

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The writer is partner, Nangia Andersen LLP

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