The BuyT Desk
Unit Linked Insurance Policies (ULIPs) are no more tax exempted. The government in the Finance Act (Union Budget) 2021 had announced capital gain tax on high premium ULIPs. It was said that ULIPs with premiums exceeding Rs 2.5 lakh will be taxed. The main reason behind this step was that high net worth individuals were paying high premiums and enjoying tax exemption. Such exemption didn’t prove to be of any benefit to small and genuine cases of life insurance and on the contrary, helped the rich in evading the tax.
What is ULIP?
Unit linked Insurance policies are one of the common investments which give a dual benefit of investment and insurance through one product. The premium paid towards a ULIP plan gets divided towards an insurance cover and to a fund investing in equity, debt or a combination of the two. The return of ULIP depends upon the performance of the fund opted by the investor.
Government Issued New Tax Rules on ULIP
The Central Board of Direct Taxes(CBDT) announced the rules of ULIP taxation on 19th January 2022. The ULIPs will be taxed as per Clause (10D) of Section 10 of the Income Tax Act, 1961. Three provisions have been inserted in Section 10 –
(i) The sum received from a ULIP issued after 1st February 2022 will not be tax exempted if the premium paid is above Rs 2.5 lakhs.
(ii)Not only the ULIPs brought after 1st February 2021 with premium above Rs 2.5 lakhs will be taxed but if the premium of old and new ULIP aggregates to Rs 2.5 lakh of premium in one year then this would be taxed.
(iii) In case the sum assured is received by the nominee after the death of the policyholder then the ULIP maturity will be tax exempted.
How will ULIP be taxed?
A new income tax rule 8 AD has been introduced to compute the capital gains tax on ULIPs. The difference between the sum received from the ULIP scheme and the premium paid will be considered as capital gains in the first instance and then the gap between incremental proceeds and premium paid will be used for computing the tax. Gains of above Rs 1 lakh will be taxable at 10% as long term capital gains tax, whereas short term gains will be at a flat rate of 15%. Apart from the capital gains tax, securities transaction tax (STT) will be levied on the purchase of ULIP irrespective of the purchase date.
