DTC fine print may be taxing

MUMBAI: The government's decision not to tax withdrawals from pension funds, provident funds and life insurance schemes may have brought cheer to investors, but financial advisors say other proposals in the revised Direct Tax Code (DTC) could pose some serious problems.
The DTC draft notes ‘‘approved pure life insurance products and annuity schemes will also be subject to EEE (exempt, exempt, exempt) method of tax treatment.'' But it does not specifically mention ULIPs.So, does it mean that unit-linked insurance plans (ULIPs) won't enjoy the same tax-free status on maturity anymore?
Two, is there any reason why one should stay invested for a longer period as the distinction between long-term and short-term gains is likely to be done away with. Sure, the government would come up with the ‘‘percentage'' which you can deduct if you hold your investment for more than a year, but at the moment one can only wait for that magic figure. The new wealth tax proposal is also likely to be more taxing on individuals as it may cover all financial assets — stocks, mutual funds and so on. Though waiting for more ‘‘clarity'' on the issue, financial advisors say these measures are likely to add to the accounting work of individuals and CAs.
‘‘It is good that they have retained the EEE (Exempt Exempt Exempt system) for PPF, pure insurance products and pension products registered with PFRDA. But ULIPs don’t figure on the list, that means these products would be taxed at the time of maturity,'' says Gaurav Mashruwala, a certified financial planner. This could be a serious disincentive for insurance buyers, who have been lapping up Ulips at the cost of pure and traditional insurance products such as term plan, endowment plan and so on. Ulips have also been in the news lately as there were serious complaints about agents mis-selling these products, especially after Sebi banned upfront commissions on mutual fund schemes.
‘‘We still don't know whether products other than term plans would be taxed. We are awaiting clarification,'' says an insurance advisor. ‘‘Normally, insurance products don't attract tax at any stage.''
Financial advisors also feel that the proposed changes in the capital gains tax could discourage long-term investment in equity. ‘‘This could be a serious disincentive for people to go for long-term investments. When you don't have any major distinction between the tax treatment of long- and short-term gains, it really goes against the government stance of encouraging long-term investments in the stock market,'' says Suresh Sadgopan, chief financial planner, Ladder 7 Financial Advisories. ‘‘They should have maintained the distinction between short- and long-term capital gains.''
Experts also find the likely deduction allowed in capital gains on investments held over a year a bit confusing. ‘‘It is said that the government would come up with a certain number every year, but how they will do that, that too without any indexation.. it is very confusing,'' says Mashruwala.