Investment: Tax reforms can give better choices

livemint.com:

insurance agents have been selling flawed unit linked insurance plans (Ulips), endowment plans, and other such financial instruments to gullible investors because of their tax advantage over equity. Below are some examples: The capital gains on the maturity of an Ulip are tax-free if the total sum of premiums remains under ₹2.5 lakh per year. Rebalancing within a ULIP (from debt to equity, dividend to growth plan, etc.) also does not attract taxes, unlike mutual funds where moving from an equity to a debt scheme (or vice-versa) within the same asset management company is treated as buying and selling activities and attracts taxes.

Capital gain from real estate is eligible for indexation benefits. With certain conditions, reinvestments of the sales proceeds from the old property into a new one is also tax-free. Due to these disparities, investors often invest in real estate in anticipation of capital gains with optimal taxation.

Unfortunately, most get stuck with low rental yields and a long-drawn sale process. Everything remaining constant, short-term capital gains (STCG) on an equity mutual fund is taxed at 15% compared to bonds where STCG is taxed at slab rate. Thus, investors in the higher tax bracket have a clear disadvantage in investing in bonds or debt mutual funds.

Similarly, fixed deposits are taxed at a slab rate. To be sure, over the last couple of years, the government has taken many steps to bring parity regarding the tax treatment of different asset classes. For instance, removing the LTCG indexation benefit for debt mutual funds brought these at par with fixed deposits and corporate bonds.