New ULIP taxation rules notified
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 government has amended income tax and the securities transaction tax rules for taxation of gains from unit linked insurance policies (ULIPs) beyond the level specified in the Finance Act of 2021.
The Securities Transaction Tax (first amendment) rules and the Income Tax (second amendment) rules together put in place finer details of the new taxation regime of ULIPs, the annual premium for which is more than ₹250,000. The rules specify how to compute capital gains for taxation from ULIPs above this premium threshold in different scenarios and set out the reporting requirement of insurance companies.
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 noticed. They were claiming tax exemption for gains made in huge ULIP investments. Allowing such exemption in policies with huge premium defeats the legislative intent of this tax benefit, the finance ministry then said, adding that the intention was to provide benefit to small and genuine cases of life insurance. Accordingly, the government sought to levy tax on the capital gain from ULIPs with annual premium above ₹250,000.
Also, the new rules bring clarity on the liability of collection of securities transaction tax (STT) on such policies at the time of sale for which reporting requirements have also now been notified.
The amended rule prescribes form 2A as the annual return for insurance companies that has to be filed before 30 June, according to Aravind Srivatsan, tax leader at Nangia Andersen LLP, a consultancy.
Srivatsan said income tax exemption to ULIPs has been partially withdrawn for ULIP's purchased after 1 February 2021 and STT will be levied on all transactions irrespective of the purchase made before February 1, 2021. A new Income Tax Rule 8AD has also been inserted to provide for the computation mechanism for the gains from ULIP redemption which were purchased after February 1, 2021 and not exempted under section 10(10D) of the Income Tax Act.
“With the new computation mechanism in place, such details of redemption would also be available in the new annual information statement (AIS). The details are available for the tax payer as well and would get auto-populated in the tax returns going forward," said Srivatsan.
The denial of tax benefit in the case of large investment ULIPs is not applicable for payment of proceeds in the case of death of the insured. To ensure that the tax benefit from savings instruments reach only to the intended beneficiary, the government had also amended the tax regime applicable to provident fund. The Finance Act 2021 introduced a new provision that makes interest accrued in the PF account on contribution above ₹2.5 lakh a year taxable. This only applies to contribution made from 1 April 2021. In cases, where there is no employer contribution, the threshold is ₹5 lakh.
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