NEW DELHI: Ever since the Union Budget of 2018 introduced a long-term capital gains tax on equity investments, Unit Linked Insurance Plans (ULIPs) have become extremely popular—not necessarily for their insurance cover, but because they were one of the few instruments that high net individuals could use to realise tax-exempt returns.
So far, ULIPs had Exempt-Exempt-Exempt (EEE) status, i.e, the investment in ULIPs, accrued gains, and the final maturity amount were all exempt from taxation. But the Budget of 2021 presented last week has plugged this avenue by proposing to treat the returns from ULIPs with annual premiums of Rs 2.5 lakh and above on par with equity investments.
This is not a problem for those allocating less than Rs 2.5 lakh per annum for ULIP premiums, nor is it an issue for those with existing ULIPs— the new regime will be applicable only for plans begun from April 1, 2021.
For existing ULIPs, investors will continue to enjoy EEE status until maturity. The proposed regime will also bypass those treating ULIPs as insurance products and not investments since the maturity amount received on the death of the policyholder will continue to enjoy EEE status.
However, if you are one of those who were planning to begin a ULIP plan with annual premiums over Rs 2.5 lakh to cut down your taxable income, you are now out of luck.
According to the finance minister’s proposal, the maturity amount for such plans will now be liable for capital gains tax (10 per cent for periods above 1 year and 15 per cent for shorter durations) on par with equity mutual funds.
Simple enough, but insurance experts say that tax authorities will need to clarify a few aspects of the proposed tax regime. For instance, one does not know whether ULIPs that are based on debt funds will be liable for the new tax.
Because unlike equity mutual funds, many ULIPs offer investors/policy-holders the option to go for either equity or debt schemes. The budget memorandum is unclear whether the capital gains tax will be applicable for debt-based ULIPs with premiums above Rs 2.5 lakh per annum or whether they will continue to enjoy EEE status.