People invest in equity-based products, hoping to gain higher returns than other categories of investments. While equity products are known for their high returns, they also have high risks compared to most investments. Equity products are perfect for people who want to invest in the equity market under the professional guidance of fund managers. While there are several equity products out there, each product has its distinct tax implication. Equity-based ULIP is one such product that has been gaining popularity because of its multiple levels of tax benefits compared to other products.

Meaning of ULIP

Unit Linked Insurance Plan (ULIP) is a type of life insurance that also has an investment component to it. The dual benefit of buying a ULIP ensures that you get a life cover protecting your loved ones in your absence, along with providing returns on investments in the long haul. When you buy a ULIP, you pay premiums, similar to other life insurance types. Here, the premiums that you pay are divided into two parts, one part is used for providing you with a life cover while the other is invested in funds of your choice.

The investment component of a ULIP allows you to choose funds from three broad categories: equity, debt, and a combination of both. You can choose any of the three based on your risk appetite. If you are looking for higher returns and are ready to take higher risks for it, equity funds would be ideal for you. However, if you want your ULIP investments to be safe, in terms of risk, debt funds suit your needs perfectly. If you want to invest in equity but are not ready to place all your money in it, there are balanced funds. In balanced funds, the money you invested is partly used in equity-based funds and partly in debt funds. This helps to mitigate the risk while providing you with moderate returns.

ULIPs have a unique feature where you can switch the allocation of your funds anytime you want. Most ULIPs allow you to do it for free up to two or three times during the policy tenure. This feature ensures you can benefit the most from market volatility by switching and gaining maximum returns. Use a ULIP calculator to get an estimate of the returns you will receive by the time your ULIP matures. Also, after the lock-in period of your ULIP, you are allowed to withdraw funds partially whenever you need them.

Tax implications of ULIP

Since the meaning of ULIP is a dual instrument of life insurance and investment, it has substantial tax benefits. The premiums that you pay when you buy a ULIP are exempt from taxes under Section 80C of the Income Tax Act. The limit of exemption is annually up to Rs 1.5 lakh. Also, the amount that you have invested in your ULIP, to be received upon maturity is exempt from any capital gains tax (provided that the annual premium of your ULIP does not exceed Rs 2.5 lakh). ULIP is the only way one can invest in equity markets without having to pay Long Term Capital Gains (LTCG) tax. Also, with the duration of the ULIP, if the policyholder loses their life, the sum assured that the nominee receives is also tax-free. Since ULIP has an insurance and investment component to it, there are several tax benefits one can avail of from it. Use a ULIP calculator to align your investment based on your goals and risk appetite.

Tax implications of equity-based mutual funds

The tax implication of equity-based mutual funds is extensive, as compared to that of a ULIP. On the units that you buy or sell of equity-based mutual funds, you need to pay the Securities Transaction Tax (STT) of 0.001%. The dividends that you receive from equity-based mutual funds are taxed in the same way as stocks. This means that your dividends are treated as long-term capital gains from equities, where any gains above Rs 1 lakh are taxed at 10% (10.4% after including the surcharge). Here, a long term is considered to be a duration of 12 months or longer.