Budget 2021: Tax Exemption On ULIP Proceeds Capped
Budget 2021 proposed to limit exemptions on proceeds from unit-linked insurance plans that have so far allowed large investors to receive tax-free returns.
The Narendra Modi government proposed to amend the clause in the Income Tax Act pertaining to taxation of proceeds from ULIPs, according to the Finance Bill, 2021. For ULIPs taken on or after Feb. 1, the maturity proceeds of policies with an annual premium of more than Rs 2.5 lakh will be taxable on par with equity-linked mutual fund schemes.
Individuals holding multiple ULIPs with an aggregate premium in excess of Rs 2.5 lakh will have to pay tax on the proceeds.
ULIPs combine life insurance and investments into equity and debt. In the event of the policyholder’s demise, either the sum assured or proceeds of the investments, whichever is higher, are paid out to the nominee. This amount paid to the nominee, the government said, will continue to be tax free.
Under the existing provisions, all proceeds from ULIPs are tax free, irrespective of the amount of premium paid by the individual.
“Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in ULIP with huge premium,” according to the memorandum explaining the provisions in the Finance Bill. Allowing this exemption in policies with large premiums, the memorandum said, defeated the legislative intent of the clause, which is aimed at providing benefit to small and genuine cases of life insurance.
ULIPs gained prominence after the introduction of capital gains tax on investments in equity and equity-linked instruments in Budget 2018. Long-term capital gains tax of 10% was levied on the returns of such investments held for more than one year.
“Investments into ULIPs became lucrative as a result of reintroduction of long-term capital gains tax on equity-linked products,” said Arvind Rao, certified financial planner and founder of Arvind Rao & Associates. “This cap on exemptions brings parity between ULIPs and long-term investments into equity mutual funds.”