The revised discussion paper on DTC, has an effect of loss of tax immunity on the popular Equity Linked Savings Scheme (ELSS) and ULIPs.
Presently, the revised discussion paper, has mentioned only the following six schemes will be tax-free, thus enjoying the EEE status:
• Government Provident Fund (GPF)
• Public Provident Fund (PPF)
• Recognised Provident Funds (RPFs)
• New Pension Scheme (NPS) (administered by PFRDA)
• Approved pure life insurance products
• Annuity schemes
And the objective of doing so is to encourage taxpayers to invest in long-term savings schemes. The revised discussion paper has also said that the rules for contribution and withdrawal will be harmonised and made uniform so that savings are made by the taxpayer for the long term.
“ULIPs will be out of the Exempt, Exempt, Exempt (EEE) tax regime,” said a senior finance ministry official, referring to the different stages at which financial instruments may be taxed.
At present, like all insurance products, the returns earned by ULIPs are free of income tax. However, the returns from the investment part of these products is also tax-free simply because these products come in the garb of insurance.
I have read opinions in the media that the tax incentives of the ULIPs/ELSS should continue because they are popular and contribute to the infrastructure projects.
I don’t think it’s a valid argument in favour of giving tax incentives to these products. Because we have excellent products that give you enough tax incentives like the NPS and the PF. They need to be popularized in the interest of the ordinary investor.
What do you think? Should the tax incentive for the ULIPs and ELSS continue?
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It does seem to be a good decision for the long run, which would get more people to stay invested for long-term.
But the problem with these changes is that you have to re-plan your savings. Changing rules on long-term (3 years is still ‘long’) savings like ULIP/ELSS will mess up your current plans because you didn’t know that the rules are going to change in between and you are anyway locked-in to these schemes.
Manish, This also means that factoring in the tax implications of the future is not of much use. It may be a good idea to stick to the tax benefits of the present, I guess.
Why should the govt decide this and limit our choices. There are n number of people who are into ulips or elss for long term. Why screw them?
@Midhun The Government definitely has a role here. There would be others who will say that the govt. is not doing enough.
It is important to differentiate between insurance and investment products. ULIP is getting tax benefits under the garb of an insurance product while it has more elements of investments rather than insurance.
ULIPs are faulty products and are misselled. These products are developed only for the benifit of the agents and insurance companies and not for the investor. Misselling will get reduced if the status changed from EEE to EET.
For the ELSS they should continue the EEE status as this is the mutual fund without entry loads and max benifit is to the investor and not the agent.
Regarding DTC proposal on ELSS/ULIP, I think ELSS should be made EEE. I dont support ULIP schemes and at least bringing tax on ULIP returns will reduce the rampant selling that’s happening for a while.
ELSS will encourage retail investors, those who are clueless on owning good stocks by themselves, to invest and reap benefit of the so called great Indian future. More over, we are hearing stories like % of public holding stocks is abysmal. At least by making ELSS tax exempt, you can encourage new investors to take part in equity market. Now this EEE on select schemes will further discourage salaried class to invest in ELSS schemes.
Already MFs inflows are getting hammered with SEBI rules and now this rule will bring in a big dent on to their inflow pipe
Hello,
According to me, ULIP and ELSS out of tax exemption is not good. ULIPs are sold in the past years so heavily and many people have bought this as investment and tax advantage which is not the case now. ELSS is the only one which was having exposure to market with a short locking period of 3 years, now this is also gone.
I think ELSS should be again give a tax benefit.
I think ELSS should remain under EEE regime as it encourages small investors to participate in equity market. ULIPs should be brought under EET but only for the policies taken after April, 2012 when DTC comes into effect as existing policies have been taken by investors based on existing ITA rules.
How does it matter? You would be only paying STT for ELSS after 3 years and no long term capital gain tax