Outflow-stricken equity MFs look for boost from Ulip tax changes

Starting this month, new Ulip plans with annual premium of over Rs 2,50,000 are proposed to be taxed in the same way as capital gains on transfer of equity-oriented MF units

The Rs 30-trillion mutual fund industry is anticipating a boost in investor flows due to change in tax treatment on unit linked insurance plans (Ulip), a product rivalling equity schemes, but offered by the insurance industry.

In January, equity MFs logged their seven straight month of outflows totalling over Rs 42,000 crore.

Starting this month, new Ulip policies with an annual premium of more than Rs 250,000 are proposed to be taxed on the same basis as applicable to capital gains realised on transfer of equity-oriented mutual fund units.

Industry players say the move will tilt the scale in favour of MFs, which boasts of low cost and greater transparency.

“The amendment is likely to take some sheen off Ulips as an insurance-cum-investment product, given that previously investors incertain ULIPs enjoyed full tax exemption,” said a note by Deloitte.

Experts said equity MFs can steal the thunder over Ulips when it comes to big-ticket lumpsum investments.

“The protection (life cover) offered by the Ulips was limited and it was positioned as an investment product. So, from a purely investment perspective equity MFs are more advantageous than Ulips. I expect greater flows in equity schemes from high net-worth individuals (NHIs) due to these changes,” said G Pradeepkumar, Chief Executive Officer of Union Asset Management Company (AMC).

 

Ulips offers policyholders both insurance as well as the investment option. The amount of premium of a Ulips scheme is partly towards the insurance of the policyholder and partly towards the investment. Before the Budget, the maturity amount was tax free under Section 10 (10D).

In the Budget, the government propsed to rationalize taxation of Ulips by allowing to tax exemption for maturity proceeds having annual premium of up to Rs 250,000. This cap on annual premium of Ulips shall be applicable only for the policies taken on or after February 1, 2021.

Further, in order to provide parity, the non-exempt Ulips shall be provided the same concessional capital gains taxation regime as available to the mutual fund. Currently, on equity mutual funds (with assets of least 65 per cent in equities), long term capital gains tax is 10 per cent plus cess, provided the gain in a financial year is over Rs one lakh. Long term capital gains up to Rs one lakh is tax free.

The cost of investing in MFs is more favourable than Ulips, highlight industry players.

For equity mutual funds, the so-called total expense ratio (TER)—a measure for cost of investing—is not more than 2.25 per cent. On the other hand, Ulips there are multiple charges such as allocation charges, policy administration charges, mortality and fund management charges.

“Apart from fund performance, there is more liquidity in equity schemes compared to Ulips as there is no lock-in period,” added Pradeepkumar.

MF players expect to see the positive impact on flows this quarter, when flows are strong due to tax-saving related demand.