The BuyT Desk
You will have to either change your investment plan or reduce your premium if you invest in ULIPs (unit-linked insurance policies). Union Budget of 2021 has imposed capital gains tax on earning of ULIPs from 1st April 2021, if your premium exceeds Rs 2.5 lakhs annually.
What is ULIP?
Unit Linked Insurance Policies or ULIPs are insurance cum investment product. It gives you the benefit of an insurance policy providing a life cover along with wealth creation. Your premium is dedicated towards two purposes- one towards the insurance cover and secondly to a fund which invests in equity, debt or a combination of the two. The return at the time of maturity will depend on the performance of the fund opted by you.
Tax parity between ULIPs and MFs
As per the current income tax laws, ULIPs maturity proceeds were exempted from tax as per section 10(10)D. But a part of ULIP investment has exposure to equity, debt, securities or equity-related instruments. When you evaluate the product, you will see that ULIPs work like a mutual fund but enjoys tax exemption benefit of an insurance policy. With the imposition of tax on ULIP government has successfully brought parity between the MF’s and ULIPs.
How will ULIPs be taxed?
If the annual premium of the ULIP exceeds Rs 2.5 lakh, then the policyholder will be liable to pay tax. So far ULIPs have enjoyed exempt-exempt-exempt (EEE) status but not anymore. The gains of ULIP will now be taxed. As per the provision of section 111A and 112Am ULIPs will attract a 15% short term capital gains tax if sold within the first year of purchase and 10% long term capital gains tax if sold after holding it for more than a year. However, the maturity proceeds in the event of the policyholder’s death will be tax-free. Now ULIPs are getting the treatment of capital assets, and their gains are taxed as capital gains.
For instance, if Mr Singh is paying an annual premium of Rs 5.5 lakh and after 10 years he will be receiving around Rs 1 crore’s maturity, it would remain tax-free as it is an ongoing policy. But if Mr Singh bought this policy from 2nd February 2021 then the maturity proceeded of 1 crore will be taxed and a capital gains tax at the rate of 10% will be levied. But in case Mr Singh meets an untimely death and his dependent claims the amount, then there will be no tax on the maturity proceeds.
Why is government eyeing ULIPs with high premium?
The Budget memorandum note explains why is government levying tax on ULIP with a high premium, “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 a huge 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.”
