In the Budget 2021, it was announced that individuals will have to pay tax on Unit Linked Insurance Plans (Ulips) maturity amount if the premium paid is more than Rs 2.5 lakh per annum. Has this announcement brought the age old rivalry between mutual funds and Ulips to rest?
In an interview with Money9, Vivek Iyer, Partner, Grant Thornton Bharat talks in detail what the new announcement means for Ulip investors.
Q. How Ulips going to be taxed now?
Vivek: In case of redemption of units that are held for more than 365 days, capital gains that will be taxed will be long term capital gains at the rate of 10% over and above the exemption limit of 1 lakh applicable for long term capital gains. This is to bring it par with equity linked mutual fund savings schemes. In case of redemption of units held for 365 days or less, there would be short term capital gains payable at the rate of 15%.
The above tax treatment would apply in case of ULIPs treated as ‘Equity Oriented Fund’ (‘EOF’). There seems to be ambiguity as to whether all types of ULIP schemes would be treated as EOF as the amendment in the definition of the term ‘EOF’ suggests that only ULIPs with more than 65% equity holding will follow the same tax treatment as EOFs and accordingly, any fund with less than 65% equity holding may be taxed in line with the tax treatment applicable to debt oriented funds.
It may be noted the CBDT will prescribe the manner of calculation of capital gains which may throw light on the above point.
Q. How will the threshold of Rs2.5 lakh apply if the person has multiple ULIPs?
Vivek: This will be based on self declaration by the assessee. The limit of Rs 2.5 lakh premium will be arrived at a consolidated level across all the ULIP schemes invested by the assessee. Here again, there seems to be ambiguity as to whether the limit of Rs 2.5 lakh to be applied at individual ULIP level or in aggregation of all ULIPs taken together.
Q. Considering tax benefits where should small investors invest now? Should it be ULIP or MF?
Vivek: ULIP continues to offer deduction under section 80C at the time of investment and the maturity proceeds from the ULIP scheme will not be taxed where the annual premium is lower than Rs 2.5 lakh. With respect to ELSS scheme mutual funds, while deduction under section 80C is available, the maturity proceeds will be subject to the long term capital gains tax at the rate of 10%. So Ulips still continue to be a tax efficient asset class for small investors.
Q. The IT Act says that insurance is tax free if the SA is more than 10 times. Does the investor need to fulfill both the requirements now?
Vivek: This section will continue to apply to money back policies and endowment policies but would not be applicable to the ULIP schemes is the inference. Again, there seems to be ambiguity here in view of the specific language of the amendments. The condition of annual premium not exceeding 10% of capital sum assured (i.e. death benefit) may still apply.
Q. Will there be a tax on death benefit as well?
Vivek: There will be no tax on the death benefits under the ULIP scheme. The sum assured received as a death benefit to the nominee will continue to be tax exempt.
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