Many mutual fund managers and the mutual fund body, AMFI, have been asking for equality in taxation among equity mutual funds and ULIPs. Looks like, Finance Minister has finally heard them, but only partially. In today’s budget, Nirmala Sitharaman proposed that, “the nonexempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund.” However, ULIPs still have a higher taxation benefit over equity mutual funds.
“In order to rationalise taxation of ULIP, it is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to ` 2.5 lakh. However, the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of ` 2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021. Further, in order to provide parity, the nonexempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund,” said the Finance Minister in her budget speech.
Before the Budget 2019, both these instruments were tax free. Two years ago, long term capital gains tax of 10% was proposed for any gains over Rs 1 lakh in equity mutual funds. Experts believe that some investors might have moved to ULIPs only to save that 10% tax. Now that there is taxation on ULIPs as well, mutual fund advisors are positive. “This move will enable investors to focus on the merits of insurance and investments separately and choose them as individual offerings considering that mutual funds come with greater flexibility. Over a period of time as the tax arbitrage goes away for fresh ULIPs with higher premiums, we can see equity mutual funds getting better inflows,” says Vishal Dhawan, Founder PlanAhead Wealth Management, a financial planning firm, based in Mumbai.
Jimmy Patel, MD & CEO, Quantum Mutual Fund, who has been speaking about the unequal taxation, says the victory is not complete. “This is a positive step, but the cap is higher for ULIPs than equity funds. I would say this is a battle half won,” says Patel. He adds that he doesn’t expect too many investors to move from ULIP to equity MFs or vice-versa.
“Equity mutual fund investors have matured in the last couple of years and we have seen that the industry continues to grow despite the fall last year. I believe the instruments should be on the same pedestal, but fundamentally, equity mutual funds are much transparent, flexible and convenient for retail investors. So, I don’t think investors who understand will move to ULIPs to save the LTCG tax. We could see some investors moving back to equity MFs not much,” says Jimmy Patel.