By CA Geetanshu Bhalla, Mentor, The Virtual Compliance
The Unit Linked Insurance Plan (ULIP) so far was an EEE (exempt, exempt, exempt) category tax saving instrument. This signifies at present it is exempt below revenue tax at all 3 stages of investment (i.e., revenue tax deduction at the time of investment, exempt passive revenue and revenue tax exemption at the time of receipt of quantity below the strategy).
However, Finance Minister Nirmala Sitharaman has proposed a new regime for the taxation of ULIP, which is as below:
1. EEE category tax implications for the taxpayers possessing the ULIP strategy(s) whose annual premium or aggregate of all premiums of ULIP plans not exceeding Rs 2,50,000 in any economic year through the term of the strategy.
2. Capital acquire tax implication equivalent to equity oriented mutual fund (i.e., 10 per cent exceeding Rs 1 lakh) has been proposed for all other forms of ULIP strategy not covered above and subscribed on or immediately after the price range date (i.e., February 1, 2021).
3. Security transaction tax is proposed to be levied on sale or surrender or redemption of a unit of an equity-oriented fund to the insurance coverage firm, on maturity or partial withdrawal, with respect to unit linked insurance coverage policy issued by such insurance coverage firm on or immediately after February 1, 2021.
Let realize this with an instance:
Ms. Gupta has subscribed to the unit linked insurance coverage strategy with aggressive investment approach for which she has to spend an annual premium of Rs 7.5 lakh. If Ms. Gupta receives Rs 1 crore as maturity quantity immediately after the finish of the Plan, at present, she can take the revenue tax exemption on the complete quantity (i.e., Rs 1 crore).
However, if Ms Gupta begins investing in the identical strategy today (i.e. February 2, 2021), provided that 10 years strategy, Ms. Gupta will be liable to spend 10 per cent capital acquire in the year of receipt of Rs 1 crore. The manner to compute the capital acquire is not but notified. Accordingly, we have to wait for the notification of the guidelines to realize the actual extra tax liability.
However, if the quantity of Rs 1 crore will be received by the nominee immediately after the death of Ms. Gupta irrespective of date of subscription of the strategy, the quantity will be exempt from revenue tax in the hand of the nominee.
This amendment have to be noted by all the taxpayers who opt the ULIP strategy for their tax saving approach. Although there is no will need to cut down the annual premium of the strategy which has currently been subscribed by the taxpayers as the proposed amendment is going to be applicable only on strategy issued on or immediately after the price range date, having said that the STT implication could result in the reduction in closure quantity.
Conclusion
This amendment is proposed to preserve the verify on the taxpayers who opt the ULIP to keep away from the tax implications rather than for its original objective. Although proposed amendments bring the situations of several plans to keep away from the threshold inside its ambit. However, ULIP subscribed in the name of spouse, household members would not be counted for figuring out the threshold.
The government has not proposed to amend section 2(42A) and section 111A to provide the tax implication in case of quick-term capital acquire equivalent to equity oriented mutual funds, which could result in quick term capital acquire is taxable at slab price rather than valuable price of 15 per cent. It appears that this is an inadvertent error and positively be rectified at the time of passing of the bill.