Capital gains tax on ULIP income part of last Budget

Capital gains tax on ULIP income part of last Budget

(This story originally appeared in on Jan 25, 2022)

NEW DELHI: The government has not imposed any new tax on unit-linked insurance plans (ULIPs) but has merely implemented last year’s Budget announcement through a circular, tax department sources said on Monday.

Finance Act 2021 also inserted a provision in the Income Tax Act to make income from ULIPs taxable as capital gains, just like redemption from mutual funds. It had also delegated power to the Centre to prescribe a method of calculation of capital gains, while it was notified on January 18.

The amendment had specified that if there is more than one policy, the Rs 2. 5-lakh premium limit for a year would be applied by aggregating the premium of such policies, which required clarity, which was done through a circular issued on January19, revenue department sources said.

“They only prescribe and clarify the method of calculation of capital gains as man- dated by the amendment carried out by the Finance Act 2021,” an official said.

The Finance Act 2021 provided that the amount received under ULIPs issued on or after February1, 2021 will not be exempted if the annual premium exceeds Rs 2. 5 lakh. “This provision was enacted to create a level-playing field between mutual fund investment and ULIP investment. In case of mutual funds, the redemption units are charged to capital gains tax. However, in case of ULIP the redemption was exempt, even though the insurance part of the premium was much lower and the investment part of the premium was high. This amendment by the Finance Act 2021 ensured that both mutual fund units and ULIPs operate on the same footing,” a source explained.

A general exemption was provided to those cases where annual premium was up to Rs 2. 5 lakh in a year so that premium paid for life insurance part does not get hit.

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