To save tax every year you must be investing in many options, in which you have many options like mutual funds, insurance, ULIPs. But if you are planning to buy ULIPs to earn tax free, then now you have to be careful, as the government has decided to levy tax on investment in ULIPs above Rs 2.50 lakh. The government has clarified the terms and conditions in this regard..
The Central Board of Direct Taxes (CBDT) has issued a notification, which explains the methodology to track tax exemption status of ULIPs. In Budget 2021, it was proposed to remove the tax-exempt status on the income of ULIPs if the annual premium exceeds Rs 2.5 lakh. However, there were a lot of ambiguities about how the framework would work, especially in the case of several ULIPs involving both the pre-Budget proposals and those procured thereafter.
It is worth mentioning that old ULIPs purchased before February 1, 2021 were considered fully exempt, however, this does not mean that you buy new ULIPs with a premium of up to Rs 2.5 lakh and avail tax exemption. The latest CBDT notification states that the total premium of both new and old ULIPs will be considered for exemption and if the amount is more than Rs 2.5 lakh then this exemption will not be available for new ULIPs exceeding Rs 2.5 lakh.
Calculation of tax on bonus-withdrawals
According to the notification, bonuses and withdrawals received by the policyholder will be treated as capital gains. Based on this, tax will be calculated on it. ULIPs are stock market linked, due to which withdrawals before one year will attract short-term capital gains tax at the rate of 15 per cent. Whereas, withdrawal of investment after one year will attract long-term capital gains tax at the rate of 10 per cent.
Others were taking advantage of low income earners
In the budget for the year 2021, the government had said that people with high incomes take advantage of the benefits available to small investors. Whereas the purpose of tax exemption on small savings is to benefit low income investors. Because of this, the government has decided to levy tax on investments in ULIPs above Rs 2.50 lakh so that high income earners do not take much advantage.
Changed rules on PF too
The government has also decided to levy tax on excess investment in Provident Fund (PF) and Employees Provident Fund (EPF). Under this, tax will have to be paid on investment of more than Rs 2.50 lakh annually in PF and Rs 2.50 lakh in EPF and there is no company contribution in it. The government says that people with higher incomes were taking advantage of tax-free higher interest.
Keep an eye on your earnings
The government is keeping a close eye on all investment-related options including ULIPs. Income Tax Department has started Annual Information Statement (AIS) from last year. It contains the details of all your investments, earnings and tax applicable thereon. Arvind Srivatsan, Tax Leader, Nangia Andersen LLP, says that in the event of AIS, the tax process has become very transparent, it is not possible to hide anything.
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