Pay tax on Ulips if SC calls them ?not pure insurance?

Unless the Supreme Court says that unit-linked insurance plans are a ?pure life insurance product?, the government would impose a tax on withdrawals from savings made in this popular scheme, official sources told FE. But whether Ulips would continue to be among the saving schemes eligible for tax deduction won?t be impacted by its insurance/investment nature.

Sebi would rather treat Ulips as an investment tool than an insurance product. Ulips would lose much sheen if tax exemption goes.

The revised DTC discussion paper has said that the extant EEE method of taxation of ?permitted savings intermediaries? would continue in the DTC regime also, as the EET method proposed in the draft code would create administrative challenges apart from being potentially harsh on small investors in the absence of a universal social security system.

The revised paper has listed the permitted intermediaries as in the draft code but replaced the term ?life insurer? in the original draft with ?pure life insurance products,? which tax experts believe is a bid to exclude Ulips if they don?t get that tag from the SC.

The court would take up the matter ? on whether Ulip is predominantly insurance or investment?for hearing in July.

In EEE, an individual does not pay tax at the three stages of contribution, accretion and withdrawals while in EET, withdrawals are taxed. Currently, Ulips are among a clutch of savings on which tax deduction is allowed, with a combined upper limit of Rs 1 lakh.

Sebi and insurance regulator Irda are loggerheads over the nature of Ulips and who would regulate it, with Irda wanting to continue to treat it as an insurance product.

?The EEE status enjoyed by Ulips will not continue if it is treated as an investment product or even a product with an investment component in it. We need a direction after the two authorities ? Sebi and Irda ? are clear about it,? a finance Ministry official told FE.

Vikas Vasal of KPMG said: ?The discussion paper has said that it will go for a pure life insurance policy while giving EEE treatment. So, I think the exemption for Ulip is set to go away.?

?Ulips are not pure insurance products. They will lose tax exemption,? said Suresh Swami of PricewaterhouseCoopers.