The finance minister has acceded to AMFI’s proposal on bringing parity between taxation of mutual funds and ULIPs.
In the draft budget 2021, the government has proposed to remove the tax arbitrage that ULIPs enjoy. In the budget document, the government has proposed that investors can avail tax benefits in ULIPs only if annual premium does not exceed Rs.2.50 lakh. This means, if an investor invests more than Rs.2.50 lakh in ULIPs, he will not be eligible to avail exemption on capital gains tax.
However, there will be no tax if exit is due to death of policyholders, clarified the government.
The government said, “In order to rationalise taxation of ULIP, it is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to `2.5 lakh. However, the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of `2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021. Further, in order to provide parity, the non-exempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund.”
Currently, ULIP investors are exempted from paying capital gains tax. Many wealthy investors have invested in ULIPs due to this tax arbitrage.
Deepak Jaggi, Co-founder and Managing Director, Satco Wealth said that ULIPs would no longer be attractive for HNIs. “Clients will be more conscious now. Currently, many HNIs are investing in ULIPs largely because of tax benefits. I believe ULIPs will again become a retail product,” said Jaggi.
Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance said the government has brought ULIPs at par with mutual funds. “Tax exemption for maturity proceeds for ULIPs under section 10(10D) for annual premiums up to Rs.2.50 lakh continues. For annual premiums over Rs.2.50 lakh for ULIPs, death benefit continues to be tax exempt. For annual premium above Rs.2.50 lakh for ULIPs, the maturity benefit will now be taxed as capital gains. Thus, the budget endeavours to selectively bring in taxation parity between life insurance companies and mutual funds,” he said.
Another major development in the insurance industry is increase in Foreign Direct Investment (FDI) limit to 74% from 49% in insurance companies.
Vibha Padalkar, MD & CEO, HDFC Life said that FDI increase in insurance is a positive step for the growth of insurance industry.
Manoj Kumar Jain, Managing Direction, Shriram Life Insurance feels that increase in FDI investment will bring long term capital inflow in the insurance industry. “This will improve insurance penetration in the country,” said Manoj.
Another announcement was privatisation of a general insurance company. Currently, there are four public sector general insurance companies.