Hello Readers!
ULIP’s that is Unit Linked Insurance Plan, a kind of financial security that has benefits of both an insurance policy and an investment. That means, if you invest in ULIP’s, then your money can grow and at the same time, your loved one’s future is protected from life's unexpected turns. The third benefit of ULIP’s that attracted the investors much was its tax-free status. Well, that’s over now!!
Yes, in the Union Budget for the fiscal year 2021, Finance Minister announced that “If annual premiums of ULIP’s exceed Rs 2.5 lakh, then it will roll back from exemption”. “Such ULIPs will now be treated as capital assets and profits and gains from such ULIPs will now be taxable as capital gains,” says Mayur Shah, EY India.
Tax Status Same For ULIP’s And Equity!
According to the new provision announced for ULIP’s in the Union Budget 2021, gain made on policies that have annual premiums of more than Rs 2.5 lakhs will now attract short-term or long-term capital gains (LTCG) tax at redemption or maturity, at par with other equity-oriented investments.
Chetan Chandak, Director, TaxBirbal.in, “The provisions of section 111A and 112A would apply on sale/redemption of such ULIPs and it would attract 15 percent short-term capital gains tax (STCG) or 10 percent LTCG depending on the holding period”.
However, the proceeds received by the policyholder’s dependents on her death will continue to be tax-free.
What Were The Tax Advantages Earlier?
Earlier ULIP’s come with an exemption tax regime. Both ULIP’s and ELSS investments were taken eligible for tax deductions on investments made under section 80C. The difference was between the lock-in period, it was five years for ULIP’s and three years for ELSS. After a period of investment of five years in ULIP’s, investors can surrender their policies that too without any charges.
As per the Union Budget 2018, the investment part of the ULIP’s was considered as an equity-oriented investment that was subjected to long-term capital gains tax (LTCG). The 10 percent LTCG tax is applicable on gains of over Rs 1 lakh made in a financial year.
Advantages Removed!!
As per the Union Budget 2021, ULIPs with annual premiums over Rs 2.5 lakh will not enjoy the earlier tax benefits. It is clearly mentioned in the memorandum of the Union Budget 2021, that “Under the existing provisions of the 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 huge premiums. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause. The intention was to provide benefit to small and genuine cases of life insurance”.
What Financial Experts Has To Say About This?
The tax benefits in ULIP’s were the lone reason for investors' attraction and a growing interest in it. The executive of a fund house expressed that “These products were sold to high net worth investors because of the tax advantage they offered on the gains. Now, MF products can compete with ULIPs on the basis of investment returns, with tax arbitrage taken away to some extent”.
Radhika Gupta, managing director, and chief executive officer of Edelweiss AMC, said that long before when LTCG was introduced in equity mutual funds, ULIP’s being a similar wealth creation product still enjoyed the benefits of tax-free status.
However, all the financial experts have welcomed this step of the Finance Ministry. By taking this step government has cleared the demand of the MF industry for similar tax status ULIPs and MFs, not completely but at least partially.
For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).