The exemption on new unit-linked insurance plans (ULIPs) with a high premium was proposed to be removed in this Union Budget. The aim is to remove the tax arbitrage that existed. Read on to know more about new tax provisions for ULIPs.
This year’s Union Budget proposes to remove the exemption on new ULIPs with a high premium. The new tax provisions are proposed in order to remove the tax arbitrage that existed, which allowed the income from a ULIP to be entirely tax-free.
Let’s understand how the new provisions are going to affect the ULIPs-
As per the new provisions, if a ULIP is purchased on or after 1st February 2021 and the premium for any year is above Rs. 2.5 Lakhs, then the income from the policy will not be exempted. Such policies will be considered capital assets. The returns will be taxed as capital gains.
In case of an equity-oriented unit-linked insurance plan (monthly average of assets in equities is 65%), the long-term capital gains will be taxed at 10% without indexation of cost. The short-term capital gains will be taxed at 15%. Furthermore, a securities transaction tax of 0.001% will be levied on the surrender, redemption, or sale of an equity-oriented ULIP purchased on or after 1st February 2021. The amount received as death benefit will be exempted.
Can a Person Purchase Multiple ULIPs with Premium below Rs. 2.5 Lakhs each to Avoid Taxes?
This method might not help because the aggregate amount of annual premium of purchased policies on or after 1st February 2021 is to be considered as per the new provisions.
What will Happen with ULIPs that aren’t Equity-Oriented?
As per the new provisions, there is no difference between equity-oriented ULIPs and any other ULIPs. If the annual premium is above Rs. 2.5 Lakhs, then the income from any unit-linked insurance plan issued on or after 1st February 2021 will be taxed. The income will be considered capital gains for all the ULIPs. The long-term capital gains tax will be 20%, and the short-term capital gains will be taxed as per the slab rate of tax.
However, in case of equity-oriented ULIPs, long-term gains will be taxed at 10% without indexation of cost, and short-term gains will be taxed at 15%. If an equity-oriented ULIP is held for 12 months, then it will qualify as a long-term capital asset. However, the period of holding for other ULIPs to become long-term capital assets is 36 months.
What will Happen with ULIPs that were Issued Before 1st February 2021 or ULIPs with an Annual Premium Below Rs. 2.5 Lakhs?
The income from such unit-linked insurance plans will be exempted like other life insurance policies, but the annual premium for any year shouldn’t be more than 10% of the sum assured. If the premium for any year is more than 10% of the sum assured, then the returns will be taxed.