The new taxation norms in ULIPs will be applicable from February 1, 2021.

Budget 2021 proposed to limit exemptions on proceeds from unit-linked insurance plans that have so far allowed large investors to receive tax-free returns. The government proposed to amend the clause in the Income Tax Act pertaining to taxation of proceeds from ULIPs, according to the Finance Bill, 2021. For ULIPs taken on or after Feb. 1, the maturity proceeds of policies with an annual premium of more than RS 2.5 Lakh will have to pay tax on proceeds.

ULIPs combine life insurance and investments into equity and debt. In the event of the policy holder’s demise, either the sum assured or proceeds of the investments, whichever is higher, is  paid out  to nominee. The amount paid to nominee will continue to be free from taxes.

Under the existing provisions, all proceeds from ULIPs are tax free, irrespective of the amount paid by the individual.

“Instances have come to the notice where high new worth individuals are claiming exemption under this clause by investing in ULIP with high premium”, According to the memorandum explained in the Finance Bill. Allowing this exemption in policies with large premiums, the memorandum said, defeated the legislative intent of the clause, which is aimed at providing benefit to small and genuine cases of life insurances.

ULIP gained prominence after the introduction of capital gains tax on investments in equity and equity linked instruments in Budget 2018. Long term capital gain tax of 10% was levied on the returns on such investments held for more than one year.

“Investments into ULIPs became lucrative as a result of reintroduction of capital gains tax on equity linked products”. This cap on exemptions bring parity between ULIP and long term investments into equity mutual funds.

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