The Budget announcement of long term capital gains (LTCG) tax on equity investments has made returns from unit-linked insurance plans (Ulips) more attractive. The investment component in a Ulip works like a mutual fund, but with a different cost structure. As it has a tiny wrap of insurance, it is guided by different income-tax rules. As per section 10 (10D) of the income-tax Act, if the sum assured in a life insurance policy is at least 10 times the annual premium, then proceeds from the policy—maturity or early surrender—are tax free, keep in mind Ulips come with a lock-in of 5 years. Death benefit is tax free. This is a plus for Ulips, in view of the proposed LTCG tax of 10.4% on equity investments through mutual funds. Read more about it here.
This has revived the age-old debate of Ulips versus mutual funds: of convenience of Ulips versus the efficiency of keeping insurance and investments separate by buying term plans and investing in mutual funds. The maths now favours Ulips but financial advisers are cautious about recommending these as investment products.
