Centre notifies new ULIP taxation rules
Premium- The government had in the Finance Act of 2021 said that some instances of high networth individuals taking undue advantage of the tax benefit meant for small savers were notice
NEW DELHI : The Centre on Wednesday notified new rules to calculate capital gains tax on the proceeds of high-premium unit-linked insurance policies (ULIPs), following the amendments to income tax and securities transaction tax rules.
According to a notification by the Central Board of Direct Taxes, capital gains on ULIPs with annual premium of more than ₹2.5 lakh, will be calculated on payments received by the policy holder, including withdrawals and bonus.
In the Finance Act, 2021, the Centre had said that high net-worth individuals were availing the tax benefits meant for small savers through ULIPs.
Allowing such exemptions in policies with a huge premium defeats the legislative intent of tax benefit, the Union finance ministry had said.
Accordingly, the government sought to tax capital gains from ULIPs with an annual premium of above ₹2.5 lakh.
According to the new rules, the difference between the proceeds from the scheme and the total premium paid will be considered as capital gains in the first instance and, subsequently, the gap between the incremental proceeds and premium paid will be used for computing capital gains.
Long-term gains of above ₹1 lakh will be taxable at 10%, while short-term gains on the high-premium ULIPs will be taxed at a flat rate of 15%.
New rules were also notified on the liability of collection of securities transaction tax on such policies at the time of sale and reporting requirements.
According to Aravind Srivatsan, tax leader at Nangia Andersen LLP, a consultancy, the amended rules prescribe form 2A as the annual return for insurance companies that has to be filed before 30 June.
Tax exemption has been partially withdrawn for ULIPs purchased after 1 February 2021, while STT will be levied on all transactions irrespective of the purchase date, he said.
A new income tax rule, 8AD, has also been introduced for computing capital gains on redemption of ULIP units purchased after 1 February 2021, but not exempted under Section 10(10D) of the Income Tax Act.
“With the new computation mechanism in place, such details of redemption will also be available in the new annual information statement. The details are available for taxpayers as well and this will get auto-populated in tax returns going forward," he said.
Denial of tax benefits for large investments in ULIPs is not applicable in case of the death of the insured.
To ensure that the tax benefits from savings instruments reach only to intended beneficiary, the government had also amended the rules applicable to provident funds, which said interest on Employees’ Provident Fund and Voluntary Provident Fund contributions of above ₹2.5 lakh in a financial year will be taxable, effective 1 April 2021. For PF accounts where there is no employer contribution, the threshold is ₹5 lakh.
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