Under certain situations, the Budget 2021 proposes taxing gains from Ulips. Ulip Full form is Unit-Linked Insurance plans. Ulips are life insurance policies that also serve as investment vehicles. This move is being recommended to bring Ulips’ taxation in line with mutual funds’.
Currently, if the sum assured is less than ten times the yearly insurance premium of the policy, the gains from Ulips are not exempt under Section 10(10D). Apart from the aforementioned criterion, the plan states that ULIPs issued on or after 01-02-2021 will not be free from capital gains taxation if the insurance premium exceeds 2.5 lakh in any year.
Although much has been written about how taxation would be implemented, there are still some unanswered questions. On some of these issues, experts have varying opinions. Let’s take a look at what professionals have to say regarding some of your questions.
How will the 2.5 lakh limit be applied to numerous policies?
The limit will apply to individual insurance as well as the total amount of premium paid by the insured during the year. If a person has numerous plans, he or she can choose the policy on which he or she wants to claim tax exemption as long as the total premium paid for the chosen policies does not exceed 2.5 lakh.
When will this restriction be examined, and how will capital gains be taxed? So, if the total premium on my insurance is below 2.5 lakh for 5 years and then goes above 2.5 lakh in the 6th year, how will the capital gains be taxed?
In the case of a single policy, the Rs. 2.5 lakhs threshold limit is calculated on an annual basis for all the years in which the premium is paid. For example, if the premium paid in any of the years throughout the policy’s term exceeds Rs. 2.5 lakhs, the policy’s maturity proceeds will be subject to taxation. Thus, if the total premium on the policies is less than 2.5 lakhs in each of the first five years and exceeds 2.5 lakhs in the sixth year, the proceeds of the policy will be taxable as capital gains.
Will the insurance be taxed differently depending on whether the underlying fund is a debt or equity fund?
Ulips allow investors to invest in either equity or debt funds, or a combination of the two. Many are divided on whether debt funds will be taxed differently or not. The present finance bill proposal makes no distinction between debt and equity funds, stating that the treatment would be the same as an equity-oriented mutual fund.
Yes, the taxability will vary depending on whether or not the fund qualifies as an equity focused mutual fund. According to the Internal Revenue Code, an equity oriented mutual fund is one that invests at least 65 percent of its total assets in equity shares of domestic corporations listed on a recognised stock market.
Visit Finserv MARKETS to learn more about ULIPs.