48829 SIP myths you must know!
Unit linked insurance plans offers a combination of both investment and insurance. It offers a chance to invest in stock markets including government and corporate bonds, as per the preference of the policyholder.
The maturity proceeds of unit linked insurance policies (ULIPs) with an annual premium of more than Rs 2.5 lakh will now be taxable. The change will be applicable on all policies taken on or after February 1.
“Section 10(10D) of The Income Tax Act has been amended so as to prevent certain HNIs from investing large amounts of premium and claim exemption. Now the cap for exemption is for the amount invested of not more than Rs.2.5 lakhs in a year as premium. Furthermore for those ULIPs which don’t qualify for exemption, for calculation of Capital Gains, the same treatment as that of Equity Oriented Funds would apply. Hence the provisions u/s 111A and 112A would apply on sale/redemption of such ULIPs,” said Vivek Jalan, Partner, Tax Connect Advisory.
Unit linked insurance plans offers a combination of both investment and insurance. It offers a chance to invest in stock markets including government and corporate bonds, as per the preference of the policyholder. According to the existing rules, maturity proceeds including death benefits from life insurance policy are tax-free if the sum assured is more than 10 times the annual premium.
“Union Budget 2021 has rolled back exemption u/s 10(10D) for high-value Ulips where annual premiums exceed Rs 2.5 lakh. This is a welcome move and will make the level playing field for comparable investment instruments viz., Mutual Fund Schemes. But more details needs to be studied for quantum of Tax Applicability on ULIP over Rs. 2.50 lakhs,” said Rajesh Bansal, Managing Director, Midas FinServe Pvt. Ltd, a financial services firm.
In her budget speech, Sitharaman said: “Under the existing provisions of the Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in ULIP with huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause. The intention was to provide benefit to small and genuine cases of life insurance. ”
The Finance Bill states that it is proposed clause (10D) of section 10 of the Act 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 year during the term of the policy exceeds two lakh and fifty thousand rupees.