FAQ on Finance Bill 2021- Impact on Unit-Linked Plan Under Section 10(10D)

 

1. What are the changes proposed in the Finance Bill 2021 with respect to ULIP Plans?

 

As per the amendments proposed in the Finance Bill 2021, exemption under section 10(10D) of the Income Tax Act, 1961 shall not apply to the ULIP plans issued on or after February 1, 2021, where the aggregate annual premium of all ULIP plans payable in the financial year exceeds INR 2,50,000/-.  Once the ULIP policy becomes ineligible, it will remain so till the term of policy except for death claim. Premium includes riders, top-up premium, loading (if any) and GST on riders (if any).

 

It will be considered as a capital asset and accordingly will be taxable as ‘Capital Gains’ in the hands of policyholders at the time of receipt of partial withdrawal /surrender/maturity proceeds on ULIP returns.

 

In case of death, total death proceeds will remain exempted. The amount received on the death of the Life Assured shall continue to be TAX-FREE irrespective of the threshold on aggregate premium.

 

2. What are the conditions of applicability of Security Transaction Tax (STT)?

 

‘Security transaction tax’ (STT) @ 0.001% of fund value will be levied at the time of partial withdrawal /surrender/maturity payout (except death claim) on ULIP policies issued on or after February 1, 2021 where the aggregate premium exceeds INR 2,50,000/-. This will not apply to: Cases exempted under section 10 (10D) | Premium up to INR 2,50,000/- and non-compliant under section 10(10D) | Keyman Policies | Employer-Employee Policy

 

3. What are the implications where the annual ULIP Policy premium is less than INR 2,50,000?

 

- Existing provision of section 10(10D) of the Income Tax Act will continue. If the Sum Assured of any Life Insurance Policy is 10 times or more than 10 times the annual premium, then the amount received at partial withdrawal /surrender/maturity is exempted under section 10 (10D).

 

4. The amendments proposed in the Finance Bill 2021 would have an impact on which types of Insurance Plans?

 

Only Unit- Linked Insurance Plans (ULIP) will see changes in tax implications. There will be no change in the tax implications of other insurance plans.

 

5. What is the manner of calculation of Capital Gains?

 

The period of holding (to determine whether short term or long term) to be computed based on such allocated units every year.

 

Based on current interpretation, all ULIP Plans are classified as Equity Oriented Fund.

 

Short Term - Gap between last Annualised Premium (ANP) / Top-up and Date of partial withdrawal /surrender/maturity is less than 12 months. Tax rate is 15% (Excl. surcharge and Cess)

 

Long Term – Other than above, ULIP returns till INR 1 lakh will be exempted. ULIP returns exceeding INR 1 lakh will be taxed @ 10% (Excl. surcharge and Cess).

 

As mentioned in section 10(10D) of the Income Tax Act, for the purpose of removing difficulty in interpretation of the law, CBDT may issue Guidelines. Above tax rates may change on account of further clarification by Govt.

 

6. Are there any changes in the ULIP Pension policy?

 

ULIP pension policies will continue to be treated as a pension policy. There will be no impact due to proposed provisions on pension policy.

 

7. What will be the manner applicability of TDS under section 194DA?

 

Applicability of TDS will continue to be 5% for policies that are ineligible under section 10(10D) of the Income Tax Act at the time of partial withdrawal /surrender/maturity and also free-look cancellation for Indian Residents.

 

8. What will tax treatment in case of ULIP policies issued to NRIs?

 

All the above provisions of section 10(10D) will be applicable for Non-Resident Indians (NRIs) except the rate of TDS. In accordance with the proposed changes, TDS will be deducted considering capital gain based on the classification between short term / long term capital gain and rates will differ depending upon DTAA (Double Taxation Avoidance Agreement) and Indian Income Tax law.

 

Annexure – Tax Implications under Different Scenarios

No.

Scenarios

Exemption under Section 10(10D)*

1

Single policy issued on or after February 1, 2021 where the ANP exceeds INR 2,50,000/-

Not Exempted

2

Single policy issued on or after February 1, 2021 where the ANP is less than INR 2,50,000/-

Exempted

3

Three policies purchased on or after February 1, 2021 where the individual ANP is less than INR 2,50,000/- but the total aggregate ANP exceeds INR 2,50,000/-

Not Exempted

4

One ULIP policy purchased on or after February 1, 2021 where ANP is below INR 2,50,000/- in a year. In year 3 the ANP is followed by a top up of INR 50,000, than the aggregate ANP of the ULIP policy in year 3 exceeds INR 2,50,000/-

Not Exempted

5

Policy 1 issued prior to February 1, 2021 where ANP exceeds INR 2,50,000/-

Policy 2 issued on or after February 1, 2021 where ANP exceeds INR 2,50,000/-

Policy 1 : Exempted

Policy 2: Not Exempted

*Assume that all the above policies meet the condition of premium to Sum Assured ratio

 

L&C/Misc/2021/Feb/0060

 

Disclaimer
  • Above views are based on the interpretation of the proposed Finance Bill 2021 read with existing provisions of the Income Tax Act 1961.
  • For the purpose of removing difficulty in interpretation / or different interpretation, CBDT may issue Guidelines in this regards and accordingly our views will be amended, if required
  • Tata AIA Life Insurance does not assume any liability due to different interpretation of the law. Policyholders are advised to consult their own tax consultant for more clarifications.
  • This document is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. This document is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this document is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • For more details on risk factors, terms and conditions, please read the Sales Brochure carefully before concluding a sale.

 

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