InvestorQ : What are the implications of the tax liability imposed on provident funds and on ULIPs in this budget?
sarah Leo made post

What are the implications of the tax liability imposed on provident funds and on ULIPs in this budget?

Answer
image
Rashi Mehra answered.
1 month ago
Follow

The budget has made some very interesting amendments to the way Unit Linked Insurance Plans or ULIPs and PF will be taxed in India going ahead. Here are some highlights.

· The proposal will indirectly be a tax on high net-worth individuals as large contributions to PF and ULIPs are normally done by the HNIs.

· The first announcement is that the maturity amount from unit-linked insurance plans or ULIPs with annual premium above Rs.250,000 will be subject to capital gains tax.

· In addition, the interest earned on EPF and Voluntary Provident Fund or any exempted PF trusts with annual employee contribution above Rs.2.5 lakh, will be taxable.

· In line with the demand of AMFI, this is a bid to put ULIPs on par with equity-oriented mutual funds and ELSS schemes in terms of tax.

· In short, for ULIPs exemption on maturity proceeds will not apply if annual premium is more than Rs.250,000 provided the ULIP is issued after 01-Feb 2021.

· This will exclude the claim received from such ULIPs on the death of the policyholder which will continue to remain tax-exempt even in the new system.

· Due to absence of limits on ULIPs, the budget felt it was being used by a number of HNIs purely as a means of tax arbitrage.

· Since the difference in the case of ULIPs will be treated as equity capital gains, it will also have a basic exemption of Rs.1 lakh per fiscal and above that will be taxed at 10%.

· Since the ULIP profits will now be treated as capital gains, even securities transaction tax or STT will be automatically applicable.

1 Views