Finance Minister Nirmala Sitharaman has made a provision in Budget 2021 that Unit Linked Insurance Policies (ULIPs) with premiums of more than Rs 2.5 lakh will be taxed. This rule will apply to ULIP plans purchased on or after February 1, 2021. Till now, ULIPs are tax-exempt under Section 10 (10D) of the Income Tax Act. Tax experts say that the announcement of removing tax exemption on ULIPs has been made, but there is a lack of clarity about it. There is skepticism among investors and the insurance industry about this.
This is also because of how tax will be calculated if an investor shifts from equity to debt plan during the insurance period. ULIPs provide investors with multiple funds including equity and debt schemes. A policyholder can switch between equity and debt funds without any tax implication. There is no clarity in the budget on such a situation. Neeraj Kumar, CIO of Future Generali India Life Insurance Company, said, “When we have to move from equity fund to debt scheme, we need clarity on taxation. All insurance companies are waiting for clarity on this.”
Three types of options are available
According to tax experts, investors and insurance companies may get three options in the coming time. First, the government can clarify that irrespective of the underlying fund, long-term gains will be taxed at 10% if they exceed Rs 1 lakh. This will be a product-level tax. In the second case, the government can opt for fund-level tax, where the investor will have to pay tax separately on equity and debt funds. In the third option, the government can allow the exchange of funds after paying tax.
