Budget 2018: Investors could lap up Ulips to skirt LTCG tax, says report

With Budget 2018 spooking market sentiment with the 10 per cent long-term capital gains tax on equities gains, American brokerage Morgan Stanley has opined that life insurance products, particularly Ulips, could be relatively attractive for the medium to long term.   

Since the Budget announcement, Dalal Street has been bleeding after the finance minister sought to reintroduce the long-term capital gains (LTCG) tax on equity investments at 10 per cent on profits in excess of Rs 100,000 (Rs 1 lakh).

It has also slapped a 10 per cent distribution tax on long-term capital gains from equity mutual funds. That apart, there is also a dividend distribution tax at the hands of the receiver.

 

While, on the day of the Budget, the market was on see-saw ride and closed marginally down, the next day (on Friday), it saw the worst plunge since November 2014 with a massive 2.3 per cent drop. 

"We believe against the given backdrop, life insurance products, particularly Ulips (unit-linked insurance plans), could appear relatively attractive from a medium- to long-term perspective," Morgan Stanley said in a weekend note.

"Taxation of insurance products is governed by section 10d (of Income Tax Act), where the income is tax-free in the hand of the investor at the time of withdrawal. We await the Budget fine-print for further clarity, but if the above details are accurate, it should benefit private players like ICICI Prudential Life and HDFC Life," it said.

Meanwhile, mutual fund experts are of the opinion that the taxation move on equity gains as well as on dividends from mutual funds could pose a small hurdle for investment flows into MFs.

But they warned that the move could impact long-term investments in the segment and said the government should look at the possibility of people moving into Ulips to avoid the tax.

The benchmark Sensex plummeted 840 points last Friday -- its biggest single-day fall in two-and-a-half years -- while the Nifty tanked below the 10,800-mark as the sell-off continued for the second straight day after the Budget.