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Will Budget 2023 give tax parity between mutual funds and ULIPs?

Returns on equity mutual funds have been taxed based on the length of time the investment is held. Because ULIPs are considered insurance products, they are not taxed.

The demand in the upcoming budget.

For a long time, mutual funds have requested a tax parity among equity mutual funds and Unit Linked Insurance Plans, or ULIPs. The Association of Mutual Funds in India must have started sending essential suggestions to the Ministry of Finance for cognizance of the budget approach. Tax parity is also included on the list.

Will Budget 2023 give tax parity between mutual funds and ULIPs?

Returns on equity mutual funds are taxed based on the length of time the investment is held. Because ULIPs are considered insurance products, they are not taxed. The mutual fund industry has asked the government for parity in the tax treatment of capital gains from mutual fund investments and ULIPs, believing that it will improve mutual fund penetration and asset financialization.

The next month will witness if this demand will be met in the upcoming budget. However, industry participants believe that this move holds a value of noteworthiness to investors. According to them, keeping identical products on an equal basis with each other is critical for investors to evaluate them and end up making prudent investments.

Expert opinions.

Frequently, promoting an item is pushed by supplementary aspects like tax benefits and many others instead of its inherent worth and investment appeal. As a result, when making investment decisions, investors tend to prioritize short-term gains over long-term advantages and determine whether the product meets their needs. One of these ancillary benefits is a tax break. As a result, it would be prudent to align mutual funds and ULIPs so that investors invest in them based on the product’s investment appeal and suitability in the portfolio, asserts Associate Director – Manager Research of Morningstar India, Mr. Himanshu Srivastava.

Will Budget 2023 give tax parity between mutual funds and ULIPs?

Long-Term Capital Gains (LTCG) from the selling of listed equity shares and Units in equity-oriented mutual fund plans are now taxed at 10% if the LTCG surpasses Rs 1 lakh in a fiscal year. However, the proceeds from Insurance companies’ ULIPs are exempt under Section 10(10D) of the Income Tax Act if, indeed, the sum assured in a policy of life insurance is at least 10 times the yearly premium and withdrawn after a 5-year lock-in period, even though ULIPs are investment products that invest in equity stocks, similar to mutual funds, and with the added benefit of an exemption under Section 80C of the Income Tax Act on the insurance premium.

As a result, the capital gains tax rates favor ULIPs. SEBI’s “Long Term Policy for Mutual Funds,” published in 2014, emphasized the importance of similar products receiving similar treatment, as well as the requirement to remove tax arbitrage, which results in the launch of similar products under the guidance of different regulatory agencies.

Apart from that, the industry anticipates additional measures to change the two instruments up to par. However, industry participants believe that numerous of these steps may not be taken for a variety of reasons.

Will Budget 2023 give tax parity between mutual funds and ULIPs?

The Mutual Fund industry is awaiting the Budget 2023 to introduce some additional parity in the tax regime of ULIPs and Mutual Funds by discarding or reducing the 2.5 lacs premium cap on ULIPs as well as including Debt MFs and other classes of mutual funds under the sphere of 80C investments. We anticipate some relief for mutual funds to bring them on par with ULIP investments. But even so, the taxation of these investment proposals may differ significantly. This is because ULIPs are not only market-linked investments, but they also provide insurance risk coverage.

A brief introduction about the aforesaid financial instruments.

Mutual Fund- A mutual fund is an accumulation of funds that are professionally managed by a Fund Manager. It is a trust that receives money from a set of investors with similar investment goals and invests it in stocks, bonds, money market instruments, and/or other securities.

Equity Mutual Fund- These are mutual fund plans that invest their assets in stocks of multiple companies based on the underlying scheme’s investment objective. These funds hold a reputation of excellence for capital appreciation because they possess the prospects for long-term wealth generation.

ULIP- A Unit Linked Insurance Plan (ULIP) is a one-of-a-kind investment instrument that also provides life insurance protection. ULIPs allow one to build wealth for long-term goals like your beautiful home, your kid’s education, your retirement, and many more through structured investment opportunities and market-linked returns.

The final call.

This move will undoubtedly benefit the mutual fund industry and spike up mutual fund investments, resulting in increased participation from retail investors in this segment, notes Manish P Hingar, Founder of the online financial planning platform Fintoo. 

Edited by Prakriti Arora

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