FM proposes capital gain in Ulips to be taxed as equity mutual fund – Check details

Finance Minister Nirmala Sitharaman, while presenting the Budget 2021, has proposed capital gain on gains in Ulips and provide for the same treatment as the unit of the equity-oriented fund. This is, however, subject to the amount of premium paid in unit-linked insurance plans (Ulips).

The maturity proceed from a life insurance company is tax-free. This is because the Clause (10D) of section 10 of the Act provides for the exemption for the sum received under a life insurance policy, including the sum allocated by way of bonus on such policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed ten per cent of the actual capital sum assured.

The FM has proposed that the exemption under this clause shall not apply with respect to any ULIP issued on or after the 1st February 2021, if the amount of premium payable for any of the previous years during the term of the policy exceeds Rs. 2.5 lakh.

“The fine print of the budget speech also says that to rationalize taxation of Ulips, it is proposed to allow tax exemption for maturity proceed of the Ulips having annual premium up to Rs 2.5 lakh. Further, in order to provide parity, the nonexempt Ulips shall be provided 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.” says Rakesh Goyal, Director, Probus Insurance, Insurtech Broking Company

Buying multiple policies will not help because provisions have been introduced that if the premium is payable by a person for more than one Ulip, issued on or after the 1st February 2021, exemption under this clause shall be available only with respect to such policies aggregate premium whereof does not exceed the amount of Rs 2.5 lakh, for any of the previous years during the term of any of the policy.

It means, investment in Ulip, above the specified amount, will be treated as a capital asset. There will be deemed taxation of profit and gains from the redemption of Ulips to which exemption under clause (10D) of section 10 of the Act does not apply as capital gains.

Such Ulips will have the definition of an equity-oriented fund in section 112A so as to provide the same treatment as a unit of the equity-oriented fund. Thus provisions of section 111A and 112A would apply on sale/redemption of such Ulips.