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 |
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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
