If you invest in unit-linked insurance policies (ULIPs) then there is important news for you. If you pay a premium of more than 2.5 lakh rupees in a year in ULIP, then the tax exemption available under section 10 (10D) has been removed. This rule will not apply to existing ULIPs. This will be effective only on policies sold after February 1 this year. Capital gains on these will be taxed in the same way as equity-oriented mutual funds are taxed. That is, these will be taxed at 10 percent.
According to the budget, under the current provisions of the Income Tax Act, there is no cap on the amount of annual premium paid by any person during the term of the policy. There have been some instances where investors with high net worth are investing in ULIPs with huge premiums and claiming exemption under this clause. The purpose of this clause is not being served by giving such tax exemption in ULIPs with a huge premium.
Provision Like Equity Oriented Fund
This means that investing in a premium amount of 2.5 lakh or more ULIPs will be considered as capital assets. Such ULIPs will be treated as an equity-oriented mutual fund under section 112A. So that it can be taxed like equity-oriented funds. In this way the provisions of sections 111A and 112A will apply to the sale or redemption of such ULIPs.
What is ULIP?
A unit-linked insurance plan is a product where insurance and investment benefits come together. They are offered by insurance companies. When you pay a premium, a part of it is used by the insurance company to provide you with insurance coverage and the rest is used to invest in debt and equity.
The combination of insurance and investment in this product comes with a lock-in period of 5 years. Customers are allowed to invest in large, mid or small-cap, debt or balanced investments according to the risk. Along with this, there is also the facility to switch to different funds.
Tax on interest received from PF
Some of the methods that have been used to save tax have been eliminated in this budget. If the interest earned by the Provident Fund Contribution is more than Rs 2.5 lakh in a year, then it will be taxed at normal rates. The move will hurt those who get higher salaries who use the Voluntary Provident Fund (VPF) to earn tax-free interest.