Finance Minister Nirmala Sitharaman, while performing the Budget 2021, has proposed capital gain on gains in ULIP and provides for the corresponding treatment as the unit of the equity-oriented fund. This is, however, subject to the quantity of premium paid in unit-linked insurance plans (ULIP).
The maturity returns from a life insurance company are tax-free. This is because the Clause (10D) of section 10 of the Act provisions for the exemption for the sum obtained under a life insurance policy, including the sum allocated by way of bonus on such policy in honor of which the premium payable for any of the years when the terms of the policy do not exceed ten percent of the actual initial sum assured.
The FM has proposed that the exception under this clause shall not apply with respect to any ULIP issued on or after the 1st February 2021, if the amount of premium owed for any of the previous years during the duration of the policy exceeds Rs. 2.5 lakh.
“The fine print of the budget language also says that to rationalize taxation of ULIP, it is proposed to provide tax exemption for maturity proceed of the ULIP having yearly premium up to Rs 2.5 lakh. Further, in order to provide parity, the nonexempt ULIP shall be granted the same concessional capital gains tax regime as possible to the mutual fund. Here we need to wait and see the details and its influence on the life insurance industry.” states Rakesh Goyal, Director, Probus Insurance, Insurtech Broking Company.
Purchasing multiple policies will not help because provisions have been introduced that if the premium is owed by a person for more than one Ulip, issued on or after the 1st February 2021, freedom under this clause shall be available only with respect to such systems aggregate premium whereof does not exceed the amount of Rs 2.5 lakh, for any of the previous years during the time of any of the policy.
It means, investment in Ulip, above the specified amount, will be interpreted as a capital asset. There will be considered taxation of profit and gains from the improvement of ULIP to which exemption under clause (10D) of section 10 of the Act does not apply as capital profits.
Such ULIP will have the outline of an equity-oriented fund in section 112A so as to provide equal treatment as a unit of the equity-oriented fund. Thus requirements of section 111A and 112A would apply to the sale/recovery of such ULIP.