Finance Bill 2021 - 2. ULIP - At par with other financial products for HNIs - Proposed amendment

Unit Linked Insurance Plan - At par with other financial products for HNIs;

Source: The Finance Bill, 2021 and the memorandum to the Finance Bill

Introduction:

By virtue of Section 10(10D); the proceeds from insurance polices (along with any bonus declared thereon) is exempt from income tax subject to certain conditions; the relevant condition for our discussion been where the premium payment for such Insurance policy should not exceed 10% of the minimum capital sum assured.

Insurance policy as described above also includes Unit Linked Insurance Plan ('ULIP' as maybe referred hereon) whereby the proceeds from ULIP will also be tax exempt subject to the conditions mentioned.

For initiators, ULIP offers lucrative options in to invest in equity securities, Debt securities, etc. in addition to the life insurance. Hence ULIP as compared to other financial products i.e. Equity shares, units of mutual funds, debt funds, etc. enjoy the benefit of being tax exempt.

Reason for amendment

As recorded in the memorandum to the Finance bill, it appears that certain High Net-Worth Individuals ('HNI') have used this exemption provision to earn tax free returns by indirectly investing in equity and debt instruments via ULIPs. The purpose of section 10(10D) was to encourage and provide benefit to small and genuine cases of life insurance.

Conclusion and Analysis

In order to curb the practices as followed by such HNIs it is proposed in the finance bill that where the total premium paid in a year exceeds Rs. 250,000 in relation with such ULIPs, any proceed received shall not be exempt and be taxable.

Further relevant amendments have been proposed to include ULIP under the definition of capital Asset for computation of taxability of the same. Further this amendment will be applicable for any ULIPs issued on or after 1 Feb 2021.

It is proposed to include the ULIP in the definition of equity oriented funds, resulting to which the same will be taxable under section 112A / 111A.

Amendments proposed in the Income Tax Act, 1961;

• Section 10(10D); exclude ULIPs issued on or after 1 February 2021; where the amount of premium exceeds Rs. 250,0000 in any previous year. However the sum received on event of death, is still treated as exempt.
• Section 2(14) - Definition of capital Asset to include ULIP
• Section 45(1B) - Taxation of profits and gains from redemption of ULIPs
• Section 112A - Include ULIPs in definition of equity oriented funds

The above amendments will take effect from 1 April 2021 (AY 2021-22 onwards)