Taxation of ULIP products creates “level playing field” with MFs: IT department


Proceeds from high-premium unit-linked insurance schemes (ULIPs) have been made taxable to create a “level playing field” with mutual funds, official sources said on Monday.

The Central Board of Direct Taxes (CBDT), which formulates policy for the Income Tax Department, had notified on January 18 the rules indicating the method of calculating capital gains with respect to ULIPs with a annual premium of over ₹2.5 lakh and subsequently issued a circular the next day outlining various aspects of their taxation.

Income Tax Department sources told PTI that the rules and guidelines were notified by the CBDT to give effect to the announcement made regarding ULIPs in the last Union budget.

These do not bring any new tax provisions but only clarify the method of calculating capital gains when it comes to redeeming ULIPs in specific cases, they said.

“The Finance Act 2021 made an amendment to Section 10 (10D) of the Income Tax Act, as a result of which the sum received in respect of ULIPs issued on or after February 1, 2021, will not be waived if the annual premium payable for a year exceeds ₹2.50 lakh.

“This provision was enacted to create a level playing field between mutual fund investment and ULIP investment,” said a senior IT department official.

Clarifying the various aspects and concerns regarding the taxation of ULIP redemptions in certain cases, the official said that this decision was taken after it was found that ULIPs were preferred by investors for investment purposes. compared to insurance.

“In the case of mutual funds, its redemption is charged to capital gains tax. However, in the case of ULIP, the redemption was exempt, even though the insurance part of the premium was much lower and the investment part of the premium was high,” the official said. noted.

Another official said this amendment to the 2021 finance law “ensures” that mutual fund units and ULIPs operate on “the same footing”. “However, a general exemption was given in cases where the annual premium does not exceed 2.5 lakh per annum. This benefit of 2.5 lakh was provided to ULIPs (even though it was not there for mutual funds investment) so that the premium paid for the life insurance part is not affected,” the official said.

The second official quoted above added that the 2021 finance law also inserted subsection (1B) in article 45 of the income tax law to make income from ULIPs “taxable in as capital gains”, just as the redemption of a mutual fund is taxable as capital. earnings.

“The amendment (in the Finance Act 2021) also clarified that if there is more than one policy, the premium limit of Rs 2.5 lakh for one year would be applied by aggregating the premium of these policies .

“Therefore, it was necessary to provide clarification by means of a circular, informing investors of how the taxable income should be calculated when there is more than one ULIP”, said the second officer quoted above. -above.

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