The Union Budget has reportedly created a tax arbitrage between ELSS and ULIPs.
While ELSS will be taxed with long term capital gains at 10% for gain exceeding Rs.1 lakh, ULIPs will continue to enjoy EEE tax status, i.e., tax exemption on investment, accrual and maturity.
Anish Thacker, Partner, Tax & Regulatory Services, EY believes that since ELSS are equity oriented funds, these are taxable. However, ULIPs will not be taxed as such schemes do not fall under listed equity, equity funds or business trust (AIFs), he added.
Bhavin Shah, Leader, Financial Services Tax, PwC, feels that Budget 2018 has exempted ULIPs from the purview of LTCG. He said, “Clearly, ULIPs are insurance policies and hence LTCG is not applicable on them.”
Another senior official at PwC requesting anonymity said, “Though the government is yet to issue clarification on this, the first reading suggests that ULIPs are exempted from LTCG.”
Pankaj Razdan, CEO, Aditya Birla Sun Life Insurance commented, “A tax neutral budget for the life insurance industry also offers more credit play for the insurance companies. Additionally, ULIP emerges as a beneficial long term investment option under the new tax regime.”
In an advertisement, ICICI Prudential Life Insurance has said that while LTCG in direct equity and equity funds has become taxable, ULIPs offered by life insurance companies are exempted from LTCG.
However, a few tax experts have a different view. Gurgaon based chartered accountant, Amit Maheshwari, Partner Ashok Maheshwary & Associates, said that the Union Budget has clarified that all equity funds investing in listed equities will be taxed. “Both ELSS and equity oriented ULIPs invest in listed equities and hence they will be taxed according to the new norms.”
Mumbai-based tax consultant, Z.M. Kapasi, said that the Budget mentions that there will be taxation on units of equity oriented funds and ULIPs are equity oriented funds that issued units to policyholders.
Clearly, if ULIPs are exempted, the inflows in ELSS could be affected.
