It is essential to find a financial plan that aligns with your goals for the future. Both ELSS (Equity Linked Savings Scheme) and ULIP plan (Unit Linked Insurance Plan) are financial plans that enable you to secure your future through wealth creation. By purchasing a ULIP policy, you also get the benefit of insurance coverage.
 

In Budget 2018 and 2021, specific changes were introduced to the taxation rules relevant to these financial plans.
 

What is an ELSS?

Equity Linked Savings Schemes (ELSS) are mutual funds that invest mainly in equity and equity-related instruments. These funds have more exposure to risks, and the performance of the investment directly depends on the market conditions. ELSS funds are also known as tax^*-saving mutual funds, as they are eligible for certain deductions under the Income Tax Act, 1961. These schemes usually have a lock-in period of three years.
 

What is a ULIP?

A Unit Linked Insurance Plan (ULIP) is an integrated plan offered by insurance companies that combines insurance coverage and enables wealth generation through investments.

The premium paid by the policyholder is partly used to provide insurance coverage, and the other part is allocated to a fund. This fund is invested according to the ULIP policy chosen by the policyholder. A ULIP plan is a long-term financial plan chosen based on the policyholder's financial goals and risk appetite. These plans typically have a lock-in period of five years.
 

What are the tax^* benefits of ELSS and ULIPs?

Certain tax benefits apply to both a ULIP policy and an ELSS. A ULIP policyholder or an ELSS investor can claim a deduction on the investment made under Section 80C of the Income Tax Act, 1961, subject to certain conditions.
 

What is Long-Term Capital Gains Tax^* (LTCG)?

When a person sells their capital assets, whether movable (like cars, equity shares, etc.) or immovable property (a residential plot, building, etc.), they may profit. Capital gains refer to the profits or gains made by the person on such a sale. The capital gains tax is the tax levied on that profit.

The capital gains tax can be on short-term or long-term gains. This classification depends on the duration of ownership of the capital asset. In India, Long-Term Capital Gains Tax (LTCG) is levied on capital assets held for a long term. Listed securities like shares or debentures, zero-coupon bonds, etc., are considered long-term assets if held for more than 12 months or 36 months, depending on the nature of the investment.

 

Is LTCG Tax^* applicable to ELSS & ULIPs?

ELSS: Before Budget 2018, returns from ELSS were tax-free. However, in 2018, under the new budget, the applicability of Long-Term Capital Gains tax on ELSS funds was announced. Under the new regime, with effect from 1^st April 2018, if the capital gains made from ELSS in a financial year exceed ₹ 1 Lakh, the capital gains will be taxed at 10%.

ULIPs: According to Budget 2021, more value ULIP plans, i.e., ULIP plans with an annual premium of ₹ 2.5 Lakh or more, will incur Long-Term Capital Gains Tax if the plan was purchased on or after 1^st February 2021.

In such cases, the exemption under Section 10 (10D) of the Income Tax Act, 1961 will not apply. Section 10 (10D) states that when the sum assured in a life insurance policy is paid out on maturity or surrender or in case of the policyholder’s death, it is tax-free for the receiver.

If the annual premium is within the limit of ₹ 2.5 Lakh, the exemption under Section 10 (10D) will still be available, i.e., the returns will be tax-free. And even for more-value ULIP plans, the amount received by the nominee in the event of the policyholder’s unfortunate death, will be tax-free.

The capital gains tax rates differ for Equity-Oriented Schemes (EOS) and Debt-Oriented Schemes (DOS) under ULIPs.

To qualify as an EOS, equity exposure to the equity market should be a minimum of 65% in case of direct investment, and 90% in case of indirect investment through fund of funds (i.e., through mutual funds, etc.). This investment should be held throughout the policy term. If not, it will be classified as a DOS.

The tax^* rates are:
 

Particulars	Debt-Oriented Schemes	Equity-Oriented Schemes
Short-Term Capital Gains Tax (STCG)	Individual’s Tax Slab Rate	15%
Period of holding for STCG	36 months or lesser	12 months or lesser
Long-Term Capital Gains Tax (LTCG)	20% (With Indexation Benefit)	10% on capital gains above ₹1 Lakh (Without Indexation Benefit)
Period of holding for LTCG	>36 months	>12 months

 

Securities Transaction Tax^* (STT) on ULIPs:

As per the new regime, STT will be levied at 0.001% (on the value of the transaction) on ULIPs issued on or after 1^st February 2021, to which the Section 10 (10D) exemption does not apply. STT will apply to the sale, surrender, or redemption of units of Equity-Oriented funds, on maturity or partial withdrawal. Therefore, STT only applies to Equity-Oriented Schemes (EOS).

TDS on ULIPs:

In the case of ULIP plans that are not exempt under Section 10 (10D), TDS is applicable at 5% on the income at the time of maturity, surrender, or partial withdrawal based on applicable rules for calculation of income.

Factors to consider when investing in an ELSS
 

• The investments are predominantly made in equity shares or equity-related instruments.
• ELSS is a suitable investment for wealth creation as it is purely an investment scheme.
• Switching between schemes is allowed, but it only happens on redeeming the existing units. Switching means you can switch between debt or equity investments, so you are not overexposed to market risks, depending on the market conditions. Since this will be considered a ‘transfer’, it will be subject to capital gains tax^*.

 

Factors to consider when investing in ULIP
 

• In a ULIP policy, you can choose the type of asset classes in which the fund will be invested based on their risk appetite. You can choose to invest exclusively in equity funds, debt funds, money market funds, or a combination of all.
• The ULIP insurance cover, in addition to the investment returns, is one of the noteworthy benefits of buying a ULIP policy.
• A ULIP plan is suitable for people trying to achieve long-term financial goals such as building a corpus for their children’s education and marriage or saving for later years.
• A ULIP policy allows you to switch between funds.

 

Conclusion

You understand your financial goals, time horizon and study the different ULIP and ELSS plans available to you. Accordingly, you can choose the type of investment based on individual needs and risk appetite.

TATA AIA Life Insurance offers a comprehensive ULIP policy with benefits like the option of making the TATA AIA Life Insurance’s premium payment periodically for a limited period, refund of premium allocation charges and mortality charges at different points, and more!

L&C/Advt/2022/Oct/2682