Taxation of Unit-Linked Insurance Policy (ULIPs) Amendment: Budget 2021
Taxation of Unit linked Insurance Policy (ULIP): In order to rationalize taxation of ULIP, it is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to 2.5 lakh.
For annual premium above 2.5 lakh for ULIPs, the maturity benefit will now be taxed as Capital Gains.
However, the amount received on death shall continue to remain exempt without any limit on the annual premium.
The cap of 2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021.
Further, in order to provide parity, the nonexempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund.
Long-Term Capital Gains (LTCG) arising out of the sale of units of equity-oriented mutual fund schemes are taxed at 10 % if the LTCG exceed 1 lakh in a financial year (gains up to January 31, 2018 being grandfathered).
However, the proceeds from ULIPs of insurance companies (including early surrender / partial withdrawals) are exempted from income tax under Section 10(10d) of the Income Tax Act.
So, even though ULIPs invest in equity stocks, just like mutual funds, they had an advantage, which is now being partially taken away. ULIPs.
However, still enjoy the advantage of tax deduction under Section 80C of the Income Tax Act on the premium paid, something which is enjoyed only by ELSS (tax-saving funds).
Key Highlights
- Tax Exemption Limit: ULIPs with annual premium up to ₹2.5 lakh remain tax-exempt on maturity
- Taxable Above Limit: ULIPs with annual premium exceeding ₹2.5 lakh will be taxed as Capital Gains
- Death Benefit: Amount received on death remains fully exempt without any premium limit
- Effective Date: Applicable to policies taken on or after 01.02.2021
- Tax Treatment: Non-exempt ULIPs will follow the same concessional capital gains tax regime as mutual funds
- Section 80C Benefit: ULIPs continue to enjoy tax deduction on premium paid under Section 80C
Comparison with Mutual Funds
| Aspect | ULIPs (Before Budget 2021) | ULIPs (After Budget 2021) | Mutual Funds | |--------|----------------------------|---------------------------|--------------| | Tax on Maturity | Fully Exempt | Exempt up to ₹2.5L premium, taxable above | 10% LTCG if gains exceed ₹1L | | Tax Deduction on Investment | Available under Section 80C | Available under Section 80C | Only ELSS funds eligible | | Death Benefit | Fully Exempt | Fully Exempt | Not applicable |
Important Considerations
1. Policy Date Matters: Only policies taken on or after February 1, 2021, are subject to the new tax rules 2. Premium Calculation: The ₹2.5 lakh limit applies to annual premium, not total premium 3. Tax Deduction Benefit: ULIPs still offer tax deduction under Section 80C, which is an advantage over regular mutual funds 4. Death Benefit Protection: Death benefits remain fully tax-exempt regardless of premium amount
Conclusion
The Budget 2021 amendments to ULIP taxation bring them closer to parity with mutual funds while maintaining certain advantages like Section 80C tax deduction. Investors should carefully consider their premium amounts and policy dates when planning their insurance and investment strategies.
For personalized guidance on ULIP taxation and investment planning, consult with a qualified Chartered Accountant who can help you navigate these changes effectively.