Finance Minister in budget 2021 has made the maturity proceeds of the unit-linked insurance policies (Ulips) taxable. However, it will be taxable only if the annual premium is above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to the Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Are you wondering what will be the tax rate?
Ulips will be taxed at 10%, above an annual exemption of ₹1 lakh, at par with equity mutual funds. It is an attempt to rationalize taxation of Ulips. The non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to the mutual fund to provide parity with equity mutual funds.
Currently, the entire amount received under a life insurance policy is exempt under section 10(10D). Section 10(10D) of the Income Tax Act exempts any amount received under a life insurance policy including Ulips, if the sum assured is more than 10 times the annual premium. This exemption includes death benefits, maturity benefits and accrued bonus. It means until now, there was no upper limit applicable to the claim against a life insurance policy.
