Indian Union Budget 2021-22: In order to remove the tax arbitrage among unit-linked insurance coverage plans (Ulips) and equity mutual fund investments for higher-worth investors, the government has removed the tax exemption on maturity proceeds of Ulips purchased following February 1, 2021 with an annual aggregate premium of more than Rs 2.5 lakh. The gains will now be subjected to lengthy-term capital gains (LTCG) tax applicable to all equity-oriented investments. However, there will be no tax on proceeds in case of death of the policyholder.
LTCG from equity-oriented investments with holding period of more than one year are taxed at 10%. In truth, Ulips are industry-linked with a thin crust of life insurance coverage and have a lock-in period of 5 years. The quantity invested in Ulips is eligible for tax deduction beneath Section 80C topic to a maximum of Rs 1.5 lakh a year but with the situation that premium must not exceed 10% of the sum assured.
Level playing field
At present, maturity proceeds of life insurance coverage policies are exempt from tax beneath Section 10 (10D). The government in 2018 re-introduced10% tax on LTCG above Rs 1 lakh from sale of listed equity shares. For the interest of the retail investors, authorities have been asking for a level playing field among equity-mutual funds and Ulips.
Aditya M Agarwal, companion, Mahesh K Agarwal & Company, says as the Budget proposed tax on the maturity proceeds of Ulips, it will encourage persons to look at insurance coverage initially for protection and then for investment. “At present, high net-worth individuals invest high premiums in Ulips as the proceeds are tax-free.
Allowing tax exemption of maturity proceeds with large premiums defeated the legislative intent of the clause. However, in order to keep the real intention of the clause which was providing benefit to small and genuine cases, the proceeds received on the death of the individual by its nominee will be tax-free,” he says.
Amit Maheswari, tax companion, AKM Global, says in case of premium payable for more than one Ulip, exemption shall be offered only if aggregate of all such premiums does not exceed Rs 2.5 lakh. “Ulips for which no exemption is allowed on maturity as per the above provisions would be treated as capital asset and Section 112A as applicable to listed equity shares and equity-oriented mutual funds shall be applicable,” he underlines.
A note from Axis Securities says investment in Ulip, above the specified quantity, will be treated as a capital asset which could be damaging for life insurance coverage corporations have higher Ulip exposure (like ICICI Prudential) as it might impact the demand in HNI category.
Tax arbitrage pushed Ulips
After the introduction of LTCG tax on equity and equity-associated investments in 2018, insurance coverage firms have been aggressively promoting Ulips as it is an exempt-exempt-exempt solution like Public Provident Fund or Employees’ Provident Fund. Investors can pick the fund mix— substantial-, mid- or tiny-cap or even debt fund to invest based on their threat appetite. In truth, Ulips enable policyholders to switch among the fund alternatives on paying switching charges to the insurance coverage corporation.
With the tax arbitrage gone now, authorities say the actual advantage in terms of investment will lessen in Ulips. Moreover, the price structure of Ulips is greater than equity mutual funds, which lessen the worth of the fund in the lengthy-run. In equity-associated investments, the expense ratio of mutual funds is one of the lowest at 1.5-3%. A decade ago, the insurance coverage regulator capped the exorbitant front-loaded charges levied by the insurers. It capped the charges and net reduction in yield for the consumers.
Insurers levy 4 sorts of charges in Ulip —allocation, policy administration, mortality and fund management charges. The fund management charges are capped at 1.35%. Insurers deduct premium allocation charges to recover the charges incurred in processing the policy such as underwriting, health-related examinations and distributor costs straight from the premium.
Experts say following the new alterations in the price range, people must opt for a pure term insurance coverage program to cover the life threat and defend the family members. For investments, he must look at equity mutual funds for greater lengthy-term returns.
ULIPS VS EQUITIES
Maturity proceeds received on the death of the person by his nominee will be tax-free of charge
The move will encourage persons to go for a pure term insurance coverage program for threat cover and invest in equity MFs for greater lengthy-term returns