Articles 132 views February 28, 2020

The Union Budget 2020 has changed the perspective of investments as the introduction of the new category of tax slabs has changed the narrative of investment opportunities. The union budget of 2020 changed the perception of various investment options. Life insurance plans especially ULIPs and Mutual funds are two main investment tools that are used by individuals for financial planning. Many of the industry pundits have voiced their opinions on which investment is better after the budget. For the convenience of our readers, we have curated a list of changes that are introduced by the Union Budget 2020.

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Let us understand which investment tool is better after the union budget of 2020.

  1. Investment in Mutual funds is subject to long-term capital gain tax where the aggregate gain is more than Rs 1 Lakh. LTCG is taxable on all categories including equity funds.
  2. Maturity proceeds from ULIP are exempted from the ambit of tax. Even partial withdrawal of insurance proceeds does not fall under the ambit of Long-term capital gain tax
  3. Security Transaction Tax applies to the redemption amount of equity mutual fund and on every single trading of Exchange Traded funds.
    The redemption amount of ULIP policies does not attract security transaction tax
  4. Capital Gain Tax is levied on switching funds between various schemes under Mutual fund as Net asset value of each fund is different, therefore a switch from one scheme to another shall be treated as a taxable transfer.
  5. However, no capital gain tax is levied to ULIP policies as the switching between funds do not result in any capital gain
  6. The 2020 union budget has abolished Dividend Distribution Tax i.e. dividends received by the investors shall be taxed.
  7. Post the introduction of new slabs in the budget it took away tax efficiency that ULIPs offered, however, they are still one of the best investment tools because.
    • The tax-free maturity benefits under Sec 10(10D) of the income tax act is still applicable to the ULIPs but not to mutual funds.
    • People would now look for ULIPs as long-term saving and investment tool rather than a tax-saving tool
  8. Under the new tax regime, investors cannot use ULIPs and ELSS as tools for tax deduction under Section 80C of the income tax act.
  9. However, if an investor is weighing investment options based upon expense ratio then Mutual Funds wins the bargain as they are cheaper as compared to the ULIPs. Therefore, Mutual funds have a higher potential to earn higher returns.

Final Words

Both ULIPs and Mutual funds are good investment tools but both satisfy different purposes and needs. Mutual Fund satisfies the purpose of higher returns and flexibility. On the other hand, ULIPs offer insurance cover plus investment opportunities. However, to avail the best out of both the products it is recommended to understand the tax implications of both these instruments in-depth. The best way to make the most of your investment is by distinguishing your financial needs and goals at various stages and investing in these instruments accordingly.

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