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Which ULIP Fund to Invest in for Short-Term Capital Gains?

ULIPs are the unique financial products that come with dual benefit of wealth creation and life protection. In spite of being an equity investment, there is no impact of long-term capital gain tax on ULIPs. There are various ULIP products available in the market with each ULIP, offering many investment fund options to suit diverse goals of investors. ULIPs are the long-term investment products with highest tax efficiency. With more equity exposure, you can maximize your long-term capital gains in ULIP. For short-term capital gains, ULIPs allow you to invest in many debt-based funds.

Types of ULIPs

Every ULIP product is offered with various investment fund options to suit different investment objective according to the risk appetite. Below are the major types of ULIP funds:

  • Liquid / Debt / Cash Funds: These are one of the safest funds that invest into liquid money market / debt instruments. These are categorised as low-risk funds.
  • Balanced Funds: These funds primarily invest in debt securities like corporate bonds, government securities and money market instruments along with 10% to 40% exposure to equities. Balanced funds carry medium risk.
  • Income Funds: Investments into interest bearing securities like government bonds, corporate bonds and fixed income instruments. Income funds carry medium risk.
  • Equity Funds: Investments into direct equities with a high return expectation. Equity funds carry medium to high risk.

Steps for selection of ULIPs

ULIPs can be a great financial instruments for wealth creation, life protection and tax-saving, if chosen wisely. Here are few steps to follow for selection of ULIPs.

  • Financial goals: There are ULIPs for every financial goal, retirement, child education, and wealth creation. Choosing the right ULIP is the key.
  • Compare products: Though the charges have reduced, ULIPs do come with various charges. Also, the features and benefits of each ULIP vary. Hence, it’s always good to compare the products on cost-benefit basis before choosing the suitable one.
  • Flexibility: While selecting ULIPs, flexibility is an important consideration. Fund switches, partial withdrawals offered etc. need to be considered.
  • Selection of funds: ULIPs offer you various investment fund options to suit each financial goals and risk profile. Depending on your goal, return expectation and risk appetite, choose the right fund. You can even make the fund switches depending on market conditions as well.

Types of Funds Based on Financial Goals

You can choose an investment fund in ULIP based on your investment objectives.

  • Wealth creation: There are ULIP plans exclusively designed for wealth collection. These products help you in creating wealth over the long-run to fulfil many financial goals.
  • Retirement planning: ULIPs designed for retirement allows you to make investment throughout your professional career to live the golden years peacefully with the built corpus.
  • Child education: ULIP for child education helps you in fulfilling your children’s dream without any financial crisis.

Benefits of ULIPs

ULIPs come with various advantages. Here are some of the major benefits:

  • Flexibility: ULIP is one such long-term market-linked product that offers flexibility in many ways. It allows you to switch from one fund option to another anytime, depending on market conditions and your need. It also allows you to do partial withdrawals after the lock-in period. Top-ups and premium redirection is also allowed in many ULIPs.
  • Lower expenses: Unlike old ULIPs, newer versions are low-cost. Many ULIP products not even charge for fund management charge, premium allocation or mortality charge.
  • Low risk: ULIPs are not particularly meant for a set of investors. From conservative to aggressive investors, everyone can choose a suitable funds in ULIP according to risk profile. As you are not directly investing in Equity and the funds are managed by professionals, risk is not really high.
  • Fulfils lifegoals: Be it wealth creation, child education, retirement or medical emergencies, ULIPs can fulfil every lifegoal.
  • Loyalty additions: Percentage of fund value is added to the fund account as loyalty additions for staying invested for long.
  • Protects life: ULIPs provide life protection along with an investment option. In case of unfortunate event, nominee will be paid the sum assured or fund value, whichever is higher.
  • Income tax benefits: ULIPs are the most tax efficient product that offer several advantages under Section 80C, Section 10 (10D) and Section 10(10A) of the Income Tax Act, 1961.

FAQs on ULIP Fund for Short Term Capital Gains

Are ULIP returns taxable?

If the premium paid on the ULIP plan is less than 10% of the sum assured during the policy term, then the maturity proceeds of ULIP are tax free under Section 10(10D) of the Income Tax Act, 1961. However, exempted proceeds or income needs to be reported in income tax return.

Is ELSS safe?

Equity linked saving schemes are tax saving equity mutual funds that come with three year lock-in period. These funds invest majorly into equity, and hence are subjected to market risk. As the fund performance depends majorly on equity market, there is no guarantee on capital invested and returns. ELSS funds give you tax advantage under Section 80C of the Income Tax Act, 1961. They come with high return potential and are not categorised as ‘safe’.

Is ELSS taxable after 3 years?

With the re-introduction of long-term capital gain tax, return from investing in equity linked savings schemes would be taxed. As per the tax rules, long-term capital gains on equity investments more than INR. 1 lakh in the financial year would be taxed at 10% without any indexation benefit.

Is maturity proceeds of ULIP taxable?

No. The maturity proceeds from ULIP are exempted from income tax under Section 10 (10D) of the Income Tax Act, 1961. However, if the premium paid is more than 10% of total sum assured, then the tax would be applicable on maturity proceeds.

Is surrender value of ULIP taxable?

Surrender value of ULIP are tax free in below cases-

  • Policies issued before 31st March 2003
  • Policies issued between 1st April 2003 and 31st March 2012 and the sum assured is more than five times the annual premium.
  • Policies issued after 1st April 2012 and the sum assured is more than 10 times of annualised premium. That means in new ULIPs, surrender value of policies surrendered post lock-in period are not taxable, if the premium paid is less than 10% of total sum assured.

Is ULIP a capital asset?

As ULIP is an insurance product, it is not treated as a capital asset. Any premium contribution made to ULIP is not treated as capital contribution, as it is basically a market-linked insurance plan.

Is ULIP a good investment option?

Yes. ULIP is definitely a good investment option considering the low-cost involved, tax benefits, flexibility and various fund choices available to invest in. ULIPs provide you triple benefit of wealth creation for long-term financial goals, tax advantage and life protection.

Is ULIP a mutual fund?

ULIPs are not mutual funds. ULIPs are basically insurance products that come with investment component. Though both ULIP and mutual fund are managed investments, both are structured differently. Unlike mutual fund, ULIP offers you life cover along with option to investment in various fund and switch between or redirect to other funds as required.

Is ULIP tax free?

ULIPs provide many tax advantage. The premium paid qualifies for tax deduction under Section 80C of the Income Tax Act. If the premium payment is not discontinued throughout the lock-in period of five years and the premium paid is less than 10% of the total sum assured, ULIP maturity proceeds are tax free under Section 10 (10D) of the Income Tax Act, 1961. Switches are also not taxable.

Is UTI ULIP taxable?

All the ULIPs are considered as life insurance products. But, UTI ULIP is an exception to this. UTI ULIPs are taxed like any other non-equity fund, as it is a debt-oriented scheme. Maturity proceeds will be taxed at 20% with indexation and 10% without indexation.

What is section 10(10D)?

Section 10(10D) of the Income Tax Act, 1961 exempts any income received from an insurance policies such as endowment policy, ULIP, term plan and whole-life plans from income tax.

What is the difference between ULIP and ELSS?

ULIP is insurance cum investment product. On the other hand, ELSS is a mutual fund that invests in equities. ULIP allows you to invest in debt, equity and money market funds, whereas, ELSS funds only invest in equity stocks. There is complete structural difference between both the products.

What is the lock-in period for ULIP?

Lock-in period for ULIP is five years.

Which is better- ELSS or ULIP?

Both ELSS and ULIP products are designed to suit different needs. ELSS are mutual fund investments that majorly invest in equity that are suitable for medium to long-term aggressive investors. On the other hand, ULIPs are designed for long-term investors who seek life protection along with investment. It can suit conservative to aggressive investor. However, when it comes to tax advantage, ULIP scores more over ELSS.

Which is better- SIP or ULIP?

SIP allows you to invest regularly in mutual fund. ULIP is investing in an insurance product. Though both the products invest into market, returns may vary depending on the fund chosen. Both the product have their pros and cons. However, for long-term, ULIP can provide more tax-efficient return.

Which ULIP plan is best?

Every ULIP plan is a goal based and comes with varying suitability. The best plan is the one that suits your investment objective and risk profile.

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