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Impact of LTCG on ULIP plan

December 27, 2018
The need for having a reliable form of saving and investment has continued to drive our preferences in the demand-driven market. Increased level of financial awareness has resulted in a subsequent rise in the available innovative schemes that focus on the wholesome benefits for the customers. One such option that has become very popular over the years is ULIP. ULIPs are Unit Linked Insurance Plans that offer market-linked returns and serve as joint vehicles for investment as well as insurance coverage. ULIPs offer multiple benefits in terms of the coverage options as well as fund-driven returns on investment. The structure of a ULIP is fairly easy to understand. The payable premium amount towards a ULIP is further channelized into two parts. One part is payable towards maintaining the insurance cover while the other part is payable towards maintaining the fund options for investment.

The taxation part of ULIPs is very beneficial, in addition to the already existing benefits that they offer. As per the Income Tax Act, 1961, the payable contributions towards ULIPs are tax-exempt under Section 80C and Section 10D. Moreover, when it comes to comparison with MFs (Mutual Funds), ULIPs score better in the domain of taxation. As per the revised rules under the government directives, ULIPs have been kept exempt from LTCG (Long Term Capital Gains) taxation. LTCG tax is the tax payable by the investors under various slabs, over the returns that they earn from long term investments in market instruments. As per the government mandate, mutual funds will be taxed under LTCG taxation rules (with the capping of Rs 1Lac in a financial year). This has not only added to the existing tax-related benefits of ULIPs, but has made them viable instruments for investment.

One important feature of ULIPs is top up i.e. addition to the core value of fund-investment. Any contribution towards this addition i.e. towards the top up is also subject to tax exemption as per the relevant sections of the Income Tax Act, 1961. A ULIP comes with a lock in period of five years. Therefore, when viewed with the added income tax benefits (including LTCG taxation benefits), ULIPs can serve you in helping your achieve long term goals in a very smooth manner. Unlike mutual funds, however, the charges involved in ULIPs are not jointly linked under the same bracket and are rather more complex. The charges like the premium allocation charge, fund management charge, mortality charge and the policy administration charges that form the basic charge structure of a ULIP do not exist in a mutual fund. While some may argue that this works in the favor of mutual funds, yet the LTCG taxation factor weighs heavily in favor of ULIPs. It also reflects the approach of the incumbent government towards encouraging ULIP-investments. The factor of flexibility and choice of fund options offered by a ULIP and the feature of fund switching on the basis of fund performance are complimentary to the LTCG benefits of ULIP.

HDFC Life offers HDFC Click 2 Invest ULIP- an online market liked plan that offers comprehensive benefits and enriches your financial portfolio in the long run. For details, click on the mentioned link: https://www.hdfclife.com/savings-plans /click-2-invest-ulip-plan.


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