Ritik Gupta
If you intend to invest in unit-linked insurance policies (ULIPs) solely for their tax-free maturity revenue, you must speculate again.
Budget 2021 has agreed to roll back this exemption to ULIPs if their annual premiums surpass Rs 2.5 lakh. This will pertain to ULIPs purchased on or after February 1, 2021. “Such ULIPs will now be treated as capital assets and profits and gains from such ULIPs will now be taxable as capital gains,” says Mayur Shah, EY India.
New optional income tax regime.
Lower rates but no exemptions.5 lakh and below: No tax
5 – 7.5 lakh : 10%
7.5 -10 lakh: 15%
10-12.5 lakh: 20%
12.5 -15 lakh: 25%
15 lakh above: 30%— Faye DSouza (@fayedsouza) February 1, 2020
One big relief is that there are no new taxes & the urge to levy any new taxes has been curbed. This shows & provides a signal of the stability of the govt plans, the certainty that it provides to tax & business environment: Mr Pranav Sayta, Chair, FICCI Committee on Taxation. pic.twitter.com/e6SFiCpxkX
— FICCI (@ficci_india) February 1, 2021
#EYonBudget2021 | Allocation of Rs 2,23,846 crore towards healthcare is not only in line with the immediate requirement to deal with #COVID19 but also consistent with the National Health Policy 2017. Take a look at other key #Budget2021 announcements https://t.co/Jrz8CWAna4 pic.twitter.com/NQkwAVCKCZ
— EY India (@EY_India) February 1, 2021
#EYonBudget2021 | It's a balanced budget, covering #infrastructure to #healthcare without undue pressure on taxpayers: Jitesh Bansal, Tax Partner, @EY_India. Discover more at https://t.co/aH5Wo13Ney #Budget2021 pic.twitter.com/S4VKQ7XGSV
— EY India (@EY_India) February 1, 2021
1.Tax equivalency with equity funds
Gains on such policies will now fascinate short-term or long-term capital gains (LTCG) tax at redemption or maturity, at par with other equity-oriented investments. “The provisions of section 111A and 112A would apply on sale/redemption of such ULIPs and it would attract 15 percent short-term capital gains tax (STCG) or 10 percent LTCG depending on the holding period,” says Chetan Chandak, Director, TaxBirbal.in. Equity investments qualify as long-term assets if held for more than one year. Nevertheless, proceeds obtained by the policyholder’s dependents on her death will go on to be tax-free.
#EYonBudget2021 | Extended tax holiday, increased FDI limits for insurance, social security cover for gig economy workers, further incentivizing #digital payments and enabling incorporation of OPCs provide a boost for #startup economy: Ankur Pahwa on #Budget2021 @FinMinIndia pic.twitter.com/aYV7eeqhY7
— EY India (@EY_India) February 1, 2021
As per current income tax laws, maturity proceeds of life insurance policies are excused from tax under section 10 (10D). Now, ULIPs are investment-cum-insurance policies that permit disclosure to equities, besides corporate debt and government securities. In this sense, they are comparative to mutual funds. Under the old, with-exemption tax regime, both equity-linked saving schemes (ELSS) and ULIPs are qualified for tax deductions on investments made under section 80C. ULIPs come with a lock-in period of five years. You can relinquish your policies after this duration without bringing any charges.
2.Advantage removed
Section 10(10D) exemption provided ULIPs the advantage over equity mutual funds. The latter are subject to long-term capital gains tax (LTCG) on equity-oriented investments inaugurated in Union Budget 2018. The 10 percent LTCG tax is applicable on gains of over Rs 1 lakh made in a financial year.
#personalfinance | @livemint | #Budget2021 | There will be no tax exemption for maturity proceeds of unit-linked insurance policies (#Ulips) with an annual premium above ₹2.5 lakh. Read on to find out more. https://t.co/vtoH4XQdX6
— Navneet Dubey (@imNavneetDubey) February 1, 2021
Now, nevertheless, ULIPs with annual premiums over Rs 2.5 lakh will not take satisfaction in this tax advantage. “Under the existing provisions of the Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals claim an exemption under this clause by investing in ULIPs with colossal premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause. The intention was to provide benefit to small and genuine cases of life insurance,” the Union Budget 2021 memorandum notes.
In doing so, the Rs 30-trillion MF industry has got their need for tax equivalence between ULIPs and MFs, at least somewhat fulfilled.
“This a welcome move. A couple of years back, when long-term capital gains tax (LTCG) was introduced for MFs, ULIPs did not get the same treatment. ULIPs and MFs are both similar wealth creation products,” said Radhika Gupta, managing director and chief executive officer of Edelweiss AMC.
Due to the tax differential enjoyed by ULIPs, MF industry experts say investor interest in ULIPs grew more. “These products were sold to high networth investors because of the tax advantage they offered on the gains. Now, MF products can compete with ULIPs on the basis of investment returns, with tax arbitrage taken away to some extent,” said another executive at a fund house.
