Besides investing in the stocks individually, there are mainly two ways of parking money and getting a return from the same, either in the way of protection (insurance) or by way of capital appreciation (mutual funds). Even if there is no base for comparing insurance and mutual funds, if you get the expected returns of mutual funds while tax benefits of insurance, both in one scheme, it surely becomes preferable.
Exactly this is what happens in the case of ULIPs, which are categorised under the insurance scheme, and other mutual funds schemes. ULIP is a type of insurance plan which serves both the needs of protection and investment. Let’s understand deeply the issue and solutions required by asset management companies (AMCs). Here are a few parity AMCs demands as follows:
Parity in switching schemes
In the case of ULIPs or unit-linked insurance plans, you can switch from one scheme to another without having to pay any tax as when you switch plans, it has to be treated as redemption and liable to pay tax in the case of mutual funds.
AMCs require a parity as due to the facility, you might bend your interest from mutual funds to ULIPs, which is incurring losses to the mutual fund industry.
Parity in tax exemption on maturity or redemption
Currently, as ULIPs are part of insurance schemes, you do not have to pay tax on capital gain earned on the invested money, if redemption is made after the completion of 5 years. In the case of mutual funds, you have to pay tax on capital gain, which has to be paid on the abscess of the holding period of the securities.
You have to pay short-term capital gain tax on holding debt instruments for the period of 36 months at the rate according to the slab you fall, and holding debt instruments for more than 3 years of 36 months lead tax on long-term capital gains. However, in the case of equity mutual funds, such a holding period is reduced to 12 months for short-term capital gains.
Parity in premium payment
Premium payment on the ULIPs is deductible from the income under section 80C of the income tax act 1961, which allows you the maximum deduction of up to ₹1,50,000. While in the case of other mutual fund schemes, no such deduction is allowed in payment of SIP, or systematic investment plan, instalment.
AMCs are looking forward to having a similar tax deduction in both the schemes as due to the tax deduction availability, you, as investors, are parking your money in insurance-sum-investment schemes, rather than mutual funds schemes.
What steps may the government take in the 2023 budget?
AMCs are demanding parity between these two schemes, by this, companies mainly refer to either categorise ULIP as an investment scheme instead of an insurance scheme or give the same tax-related facilities to a few mutual funds schemes at least.
However, it seems next to impossible for the government to give the same tax benefits to other mutual fund schemes, most probably, the government may categorise ULIPs under investment schemes.
There are various other issues related to the tax system on investment instruments that need long attention like parity in holding period among all the security types such as equity, debts, REITs, and InvITs, which will not only help AMCs but also help you in selecting and calculating your tax easily and quickly.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com