ULIPs Equity Holding Norms: The Finance Bill 2021 has passed with 127 reforms in the Lok Sabha. In this, some provisions have also been made for high premium unit-linked insurance policies (ULIPs). The revised finance bill states that minimum equity holding requirements have been implemented on ULIPs with high premiums. Explain that the original finance bill said that ULIPs with an annual premium of more than 2.5 lakhs will not get the benefit of tax exemption available on maturity under Section 10 (10) (D) of the Income Tax Act, 1961.
What did the amendment say
Such ULIPs will be taxed at par with equity mutual funds. This amendment further states that such high premium ULIPs will have to meet some minimum equity holding threshold equal to equity mutual funds when it comes to capital gains tax. This minimum threshold limit will have to be maintained throughout the term of the insurance policy.
How much share in equity is necessary?
It was said in the Budget 2021 that those ULIPs were made taxable, in which more than 2.5 lakh annual premium would be paid. Capital gains on these will be taxed in the same way as equity-oriented mutual funds are taxed. According to the revised finance bill, if such ULIPs invest directly in equity, then 65% of their assets should be in equity. On the other hand, if they do not invest directly in equity through instruments like ETFs, then 90% of their assets should be in equity. If they fail to maintain this criterion, then the returns received from them will be treated as capital gains from any other assets. That is, there will be 20 per cent tax with indexation on holding it for a long period.
What was announced in the budget
In Budget 2021 it was said that if you pay a premium of more than 2.5 lakh rupees in a year in ULIPs, 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 per cent.
According to the budget, under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being 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 to be served by giving such tax exemption in ULIPs with 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.