Though the intention appears to be clear to provide the level playing field for mutual funds and insurance coverage corporations promoting ULIPs as investment item, but the government has itself offered a window for these who want to bypass this provision.
The Finance minister has proposed amendments in the Income Tax Act in an try to make the taxation of income received from Unit Linked Insurance Policies (ULIPs) of life insurance coverage corporations on par with equity mutual funds.
Present Provisions
Presently, proceeds received on life insurance coverage policies such as ULIPs appreciate tax exemption below section 10(10D) if the premium for any year through the premium paying term does not exceed 10% of the sum assured. So as lengthy as the premium paid does not exceed 10% of the sum assured, the income received in respect of such policies is completely tax-totally free in the hands of the policyholder. However, death claims received are completely tax-totally free irrespective of quantum of premium paid.
Reasons and Analysis of the modifications proposed
Since the lengthy-term capital gains on transfer of investments in equity mutual fund have been brought below the tax net by the Finance Act 2018 by introduction of section 112A, which hitherto used to appreciate complete exemption below Section 10(38), there was fair demand from the mutual fund business to bring in parity of tax therapy with ULIPs, which have been basically sold as equity investments goods but had undue benefit in the type of exemption below Section 10(10D). Due to this exemption, higher net worth folks used to invest in the equity by means of ULIPs.
The spending budget has proposed to amend the Section 10(10D) to restrict the exemption in respect of ULIPs for these ULIP policies exactly where the annual premium payable in respect of such policy does not exceed Rs 2.50 lakh through the premium-paying term. The income received at the time of death of the policyholder will continue to appreciate complete exemption below Section 10 irrespective of the quantity of premium or maturity worth.
Though the intention appears to be clear to provide the level playing field for mutual funds and insurance coverage corporations promoting ULIPs as investment item, but the government has itself offered a window for these who want to bypass this provision. In my opinion the proposals have been introduced half-heartedly due to the fact the spending budget proposals provide that the only these ULIP policies will be covered below the exemption exactly where the annual policy premium does not exceed Rs 2.50 lakh. What stops one from getting a number of ULIP policies with premium under Rs 2.50 lakh just about every year to bypass this amendment? In my opinion the government must do away with this exception and must rather provide for aggregate of premium paid through the year by an person.
The proposal also gives that the ULIP policies which are not eligible for exemption below Section 10(10D), the insurance coverage corporations will have to gather Security Transaction Tax (STT) at the time of payment for such ULIP policies. The proposals will apply only in respect of ULIP policies which are issued on or following 1st February. So, the current ULIP holder require not be concerned about the new proposals.
(The writer is a tax and investment specialist, and can be reached at [email protected])