The proposed amendment is going to be applicable only on plan issued on or after the budget date, however the STT implication may cause the reduction in closure amount.
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 means at present it is exempt under income tax at all three stages of investment (i.e., income tax deduction at the time of investment, exempt passive income and income tax exemption at the time of receipt of amount under the plan).
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However, Finance Minister Nirmala Sitharaman has proposed a new regime for the taxation of ULIP, which is as under:
1. EEE category tax implications for the taxpayers having the ULIP plan(s) whose annual premium or aggregate of all premiums of ULIP plans not exceeding Rs 2,50,000 in any financial year during the term of the plan.
2. Capital gain tax implication similar to equity oriented mutual fund (i.e., 10 per cent exceeding Rs 1 lakh) has been proposed for all other types of ULIP plan not covered above and subscribed on or after the budget 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 company, on maturity or partial withdrawal, with respect to unit linked insurance policy issued by such insurance company on or after February 1, 2021.
Let understand this with an example:
Ms. Gupta has subscribed to the unit linked insurance plan with aggressive investment strategy for which she has to pay an annual premium of Rs 7.5 lakh. If Ms. Gupta receives Rs 1 crore as maturity amount after the end of the Plan, at present, she can take the income tax exemption on the whole amount (i.e., Rs 1 crore).
However, if Ms Gupta starts investing in the same plan today (i.e. February 2, 2021), given that 10 years plan, Ms. Gupta will be liable to pay 10 per cent capital gain in the year of receipt of Rs 1 crore. The manner to compute the capital gain is not yet notified. Accordingly, we have to wait for the notification of the rules to understand the actual additional tax liability.
However, if the amount of Rs 1 crore will be received by the nominee after the death of Ms. Gupta irrespective of date of subscription of the plan, the amount will be exempt from income tax in the hand of the nominee.
This amendment must be noted by all the taxpayers who opt the ULIP plan for their tax saving strategy. Although there is no need to reduce the annual premium of the plan which has already been subscribed by the taxpayers as the proposed amendment is going to be applicable only on plan issued on or after the budget date, however the STT implication may cause the reduction in closure amount.
This amendment is proposed to keep the check on the taxpayers who opt the ULIP to avoid the tax implications rather than for its original purpose. Although proposed amendments bring the cases of many plans to avoid the threshold within its ambit. However, ULIP subscribed in the name of spouse, family members would not be counted for determining the threshold.
The government has not proposed to amend section 2(42A) and section 111A to provide the tax implication in case of short-term capital gain similar to equity oriented mutual funds, which may cause short term capital gain is taxable at slab rate rather than beneficial rate of 15 per cent. It seems that this is an inadvertent error and positively be rectified at the time of passing of the bill.