Finance Bill amendment lays minimum equity norms to tax big-ticket Ulips

The original Finance Bill had stipulated that Ulips with annual premiums above  ₹2.5 lakh would lose their tax-exempt status on maturity proceeds under Section 10(10)(D) of the Income Tax Act, 1961.

An amended Finance Bill 2021 passed by Parliament on 23 March has imposed minimum equity holding requirements on unit linked insurance plans, or Ulips, with high premiums.

The original Finance Bill had stipulated that Ulips with annual premiums above 2.5 lakh would lose their tax-exempt status on maturity proceeds under Section 10(10)(D) of the Income Tax Act, 1961. Such Ulips would be taxed on par with equity mutual funds.

The amendment further states that such high premium Ulips would need to meet certain minimum equity holding thresholds to be treated on par with equity mutual funds when it comes to capital gains tax. These minimum thresholds would have to be maintained throughout the term of the insurance policy.

Gautam Nayak, partner, CNK and Associates LLP, says, “Budget 2021 made Ulips with annual premiums over 2.5 taxable on par with equity mutual funds. However, the amendment to the Finance Bill further specifies that such Ulips need to either have 65% of their assets in equity if they are directly investing in stocks or 90% of their assets in equity if they are investing indirectly in stocks through instruments such as ETFs (on par with fund-of-funds). If they fail to meet these conditions, returns in them will be treated as capital gains from any other asset. Hence, they will be taxed at slab rate if held for less than three years and at 20% with indexation if held for longer.”

“High-ticket insurance policies are a very small part of the market. I would estimate that policies with premiums over 2.5 lakh are less than 10% of the industry’s sales” said Kapil Mehta, co-founder, SecureNow.in, a Delhi-based insurance broker.

“As long as the individuals are separate taxpayers, the threshold of 2.5 lakh shall apply separately. However, the benefit may not be available if the income of a dependent is clubbed with a taxpayer,” said Tapati Ghose, partner, Deloitte India.

“If the premium is payable for more than one Ulips, the aggregate premium for such policies should be considered to compare with a threshold of 2.5 lakh,” she added.

The tax exemption would be available if the annual premium of such Ulips does not exceed 2.5 lakhs and the sum assured is more than 10 times the annual premium of the policy.

It is also important to note that these changes will apply to policies issued on or after 1 February 2021. Hence, the proceeds from existing Ulips, which are issued before 1 February 2021, will continue to be exempt from tax with no threshold on the annual premium applicable, provided the sum assured is more than 10 times the annual premium of the policy.

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