Introduction of LTCG tax in equity mutual funds may see investors moving to ULIPs

The introduction of long term capital gains tax on equity mutual fund schemes may result in some investors moving away from these schemes and opting to invest in Unit Linked Insurance Plans (ULIPs), fear some mutual fund participants.

“The introduction of LTCG tax would open an arbitrage window. ULIPs will definitely have an advantage over equity mutual fund schemes,” said a mutual fund official, who didn’t want to be quoted. “It won’t be surprising if insurance advisors use the opportunity to push these products.”

ULIPs are insurance plans that offer to invest in various options including equities and debt. Since ULIPs are insurance plans, maturity benefit from them is not taxed. Even partial withdrawals are not axed. Moreover, investors can claim tax deduction on premiums paid under Section 80C of the Income Tax Act.


ULIPs are often mis-sold as investment plans. After the opening of the insurance industry in 2000, many private sector insurance companies started aggressively pushing ULIPs as an investment product with insurance element and tax benefit in them. Because these products paid huge commissions in the initial years, even the insurance sales force started mis-selling the product heavily. Finally, Insurance Regulatory and Development Authority of India (IRDA) was forced to intervene and make marginal changes in the product in 2010 to make them customer friendly.

However, investment experts continue to maintain that it is not wise to mix insurance investment needs. They recommend buying a pure term plan to secure an adequate life insurance cover and invest in mutual funds to meet various financial goals in life. They point out that one would end up with modest insurance cover and returns in ULIP. Also, it is not easy to get rid of ULIPs due to bad performance as one would lose insurance cover in the process, the point out.

After currency note ban by the central government, many new investors have started investing in equity mutual funds. The spectacular performance of the stock market along with tax-free returns were the main factors that ignited investor interest in equity mutual fund schemes. According to some mutual fund players, these investors may rethink about their investments in equity mutual funds, and they may fall for mis-selling of ULIPs since they are not sophisticated investors.