Budget 2021: No more tax exemption for Ulips with annual premium above ₹2.5 lakh
2 min read 01 Feb 2021, 03:42 PM ISTSuch Ulips will be taxed at 10%, just as equity mutual funds, as Budget closes exemption enjoyed by wealthy individuals
PremiumAnnouncement: There is no tax exemption for maturity proceeds of unit-linked insurance policies (Ulips) with an annual premium above ₹2.5 lakh, according to the budget provisions announced on Monday. The rules will apply for Ulips issued on or after 1 February 2021.
However, the amounts received under such Ulip policies on death of the policyholder will remain exempt from tax.
Vighnesh Shahane, MD & CEO, Ageas Federal Life Insurance said that for ULIPs with a premium amount of ₹2.5 lakh p.a or more, the maturity amount, which was earlier tax-free under Section 10(10D) of the Income Tax Act, will now be taxable. However, in case of the unfortunate death of the insured person, the death benefit will continue to remain tax-free. “This change could possibly lead to a dent in ULIP sales going ahead," Shahane said.
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. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause."
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Implication: Where the Ulip premium is above ₹2.5 lakh per annum, the maturity proceeds are going to be taxed as equity mutual funds and so they come on par with mutual funds. This further infers that the budget taxes returns from such Ulips at 10%, above an annual exemption of ₹1 lakh, on par with equity mutual funds.
Further, Securities Transactions Tax (STT) may also be applicable on the redemption of Ulips.
Rakesh Goyal, director at Probus Insurance said that to rationalize taxation of Ulips, it is proposed to allow tax exemption for maturity proceeds of Ulips having annual premium up to ₹2.5 lakh.
“To provide parity, the non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to the mutual fund. Here, we need to wait and see the details and its impact on the life insurance industry," added Goyal.
Chandan D.S. Dang, Executive Director, SecureNow.in said that the government is seeking to ensure that all investment options are treated in a similar manner. It reduces the tax arbitrage that was possible by investing in ULIPs. The tax benefits on death remain unchanged. "This should encourage people to consider insurance first for protection and then for investment," Dang said.
Context: As per section 10(10D) of the Income Tax Act, the provision exempts any amount received under a life insurance policy including Ulips if the sum assured is more than 10 times the annual premium. The exemption includes death benefits, maturity benefits and accrued bonus. Currently, the entire amount received under a life insurance policy is exempt under section 10(10D). This means that there is no upper limit applicable to the claim against a life insurance policy.
However, the new provision will apply to Ulips only. For instance, there are money-back policies and endowment plans which provides maturity benefit. The tax benefit received under such plans will remain exempted.
