Budget 2019: Anomalies between MF and ULIP that may be relooked in the upcoming budget : 18-06-2019

Budget 2019 India: With the Union Budget India 2019 round the corner, the mutual fund industry is waiting for better clarity to emerge as far as the LTCG tax is concerned. Currently, while the equity MF units are subject to LTCG tax, their counterpart Ulip remains tax-exempt in the hands of the policyholder.

No matter how varied a mutual fund (MF) and a unit-linked insurance plan (Ulip) is, both of them largely compete for the same slice of the investor’s money. In reality, MFs are the truest form of market-linked investment while Ulips are hybrid as they combine insurance with investment.

Although Ulip is not meant for pure investment needs, the structure makes it a kind-of MF wrapped with insurance cover around it. But, the similarities end there. The cost that one bears towards insurance in Ulips and its in-flexibilities is non-existent in MFs.

The anomalies

Unlike MFs, where one will have to buy different mutual fund scheme to diversify across classes such as debt fund, equity funds etc, in Ulips, a policyholder may allocate one’s premium across debt fund, liquid fund, large-cap, mid-cap, sector funds etc within the same Ulip.

In addition, any switch from one fund of the same Ulip is allowed at no cost (a certain number of switches free) and without any exit load irrespective of the holding period. This feature helps in asset allocation depending on one’s risk profile and portfolio requirements at no cost.

The biggest advantage lies in the fact that there’s no LTCG even when the policyholder redeems units in Ulips mid-way during the tenure or on maturity. Ulips allow units to be redeemed after a holding period of five years or one may go for partial withdrawals after five years. Both partial withdrawals and maturity value are tax-free in the hands of the policyholder in the year of receipt of funds.

In Budget 2018, with the re-introduction of LTCG on equities and equity MFs, the MF industry feels the level playing field, has been lost. “Long term capital gains tax applies to investment in MFs. However, the savings products from insurance industry like Ulips are not subject to capital gains tax. This anomaly needs to change so that MFs can compete on a level playing field,” says George Heber Joseph, CEO & CIO, ITI Mutual Fund.

Switching between one MF scheme to another within the same fund house or from one category to another is not allowed unless one bears the exit loads or tax as per the period of holding. Switching funds from a debt fund to an equity fund or from an equity fund to another equity fund of the same fund house if allowed, subject to certain caps, may smoothen the ground between the two investment products. “Today, a switch between different schemes of the same asset management company or even different plans of the same scheme are subject to taxation. The tax rules can be amended so that only ultimate withdrawal by the investor is subject to taxation,” says Joseph.

Currently, the section 80C limit of Rs 1.5 lakh per annum includes PPF, NSS, EPF and ELSS amongst several other tax savers. The industry expects the limit to be enhanced as the scope of saving in ELSS especially for high earners gets exhausted from other sources. “The limit of Rs 1.50 lakh on investment u/s 80C should also be increased to promote greater financial savings,” adds Joseph.


Ulips are complex hybrid investment products and suit those who lack the financial discipline to manage protection needs and investments separately to achieve goals which are at least ten years away. In addition to their savings in Ulips, a Ulip policyholder may still need life cover through pure term insurance plans. Although ulips have high initial costs, over the long term, the costs in Ulips average out.

While both of them have their own advantages, its important to understand how each of them works, how they will help in reaching one’s goals, how much flexibilities are allowed and then decide. Tax advantage should be the last reason to route one’s savings into any one investment product. Therefore, anomalies should be removed paving the way for an informed investor to choose the right vehicle for reaching the goals. Will Budget 2019-20 be able to make the MF industry regain its lost level playing field?

Source : PTI

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