If you are thinking of investing in unit-linked insurance policies (ULIPs) and your aim is to earn tax-free income only at maturity, then you should think again.
In Budget 2021, a provision has been made that if the premium going in ULIP is more than 2.5 lakh rupees then you will not get this rebate. This rule will apply to ULIPs purchased on or after 1 February 2021.
Mayur Shah of EY India says, “Such ULIPs will be taken as capital assets and the profits and benefits from these ULIPs will be treated as taxable under capital gains.”
Equality of tax with equity funds
This means that the benefits on ULIP policies will be considered subject to short-term or long-term gains (LTCG) tax at the time of redemption or maturity. The same goes for other equity-based investments.
“The provisions of sections 111A and 112A will apply to the sale or redemption of these ULIPs and its holding period will attract 15 per cent short-term capital gains tax (STCG) or 10 per cent LTCG,” says Chetan Chandak, director of TaxBirbal.in.
Equity investment is considered as a long-term asset if held for more than a year. However, upon the death of a policyholder, the amount received by those dependent on it will still be tax-free.
According to current income tax laws, the maturity amount of life insurance policies is exempt from tax under section 10 (10D).
ULIPs are a mixed form of investment and insurance policies. They invest in equities, corporate debt and government securities. In this context, they can be compared to mutual funds.
In the old with-exit tax regime, both equity-linked saving schemes (ELSS) and ULIPs are entitled to tax deduction on 80C investment.
ULIPs come with a lock-in period of five years and after that you can surrender your policies and there is no charge on it.
Exemption available under section 10 (10D) gives ULIPs an edge over equity mutual funds. This is because equity mutual funds are subject to long-term capital gains tax (LTCG) on their equity-based investments. In the Union Budget of 2018, it was decided to impose this tax on them.
Gains of more than Rs 1 lakh in a single financial year attract 10% long term capital gains tax. However, from now on ULIPs with an annual premium of more than Rs 2.5 lakh will not get this benefit of tax exemption.
The Union Budget 2021 memorandum states, “Under the existing provisions of the Act, there is no upper limit on the premium paid annually to a person during the policy term. There have been cases where people with high net worth have taken advantage of exemption under this clause by investing money in ULIPs with high premiums. Giving such a discount to policies with heavy premiums fails the purpose of this clause. The aim was to provide relief to small and genuine cases of life insurance. ”
With this, the demand for tax equality between ULIPs and MFs of the Rs 30 lakh crore mutual fund industry has been met at least partially.
Radhika Gupta, managing director and chief executive officer of Edelweiss AMC, says, “This is a welcome move. A few years ago, when long-term capital gains tax (LTCG) was imposed on MFs, ULIPs were not included in its purview. Both ULIPs and MFs are products of the same capital formation. ”
Experts in the mutual fund industry say that due to the disproportionate benefits of tax to ULIPs, investors have become more interested in ULIPs.
A fund house executive said, “These products were being sold to rich investors because they were getting tax benefits on Gaines. Now MF products can compete with ULIPs in terms of return on investment. ”