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February 5, 2021

Change in Tax in ULIP and PF in Budget 2021

by Mahesh Mara in Budget, Income Tax

Change in Tax in ULIP& PF in Budget 2021

In today’s market there are many investment options available depending upon individual preferences. Some of the most sought out investment options are ULIP’s and investment in PF. Finance Minister Nirmala Sitharaman proposed many new measures in the Budget 2021 to prop up the declining economy amid the Covid-19 pandemic and boost spending across sectors. Budget 2021 focused on the seven pillars for reviving the economy – Health and Wellbeing, Physical and Financial Capital and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D, and Minimum Government Maximum Governance. Several direct taxes and indirect taxes amendments were also proposed.

Let us learn more about the changes that were brought about for taxation inULIP and PF in Budget 2021 in this article.

What do you mean by ULIP?

Unit Linked Insurance Plan (ULIP) is a mix of insurance along with investment. From a ULIP, the goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with the investor’s long-term goals.

Taxation of ULIP before Budget 2021

  • Premium paid on ULIPs is eligible for a deduction under Section 80C up to a maximum of Rs 1.5 lakhs during a year.
  • Further, Section 10(10D) provided exemption in respect of sum received under a life insurance policy if the premium payable for any of the years during the terms of the policy did not exceed 10% of sum assured.
  • ULIP’s followed exempt-exempt-exempt (EEE) taxation.
  • It meant that an individual got a tax deduction on investment, there was no tax on accrual and until now there was no tax on withdrawal for all policyholders.

What changes were brought by Budget 2021 in taxation of ULIP’s?

  • Considering the instances that high net worth individuals are claiming exemption under said section by investing in ULIP with huge premium, the Finance Bill 2021 has proposed that the exemption under section 10(10D) shall not be available with respect to any ULIP issued on or after the 01-02-2021, if the amount of premium payable during the term of the policy exceeds Rs. 2,50,000 per annum.
  • For investors who pay annual premiums below that, they would still get the benefit of EEE taxation.
  • Further, it has also been proposed that a ULIP (not eligible for exemption under section 10(10D) shall be treated as capital asset.
  • Section 10(10D) exemption gave ULIPs the edge over equity mutual funds, as the latter are subject to long-term capital gains tax (LTCG) on equity-oriented investments introduced in Union Budget 2018. The 10% LTCG tax is applicable on gains of over Rs 1 lakh made in a financial year.
  • Now, however, ULIPs with annual premiums over Rs 2.5 lakh will not enjoy this tax advantage. 
  • The advantage that ULIPs had over equity mutual funds (MFs) will no longer be there as Budget 2021 has brought the gains made from ULIPs with premium over Rs 2.5 lakh on par with equity mutual funds. So, gain from such ULIPs is treated as capital gain just like equity MFs and will be taxed accordingly.

What do you mean by Provident Fund?

A provident fund is a retirement fund run by the government. They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount. If a participant dies, his or her surviving spouse and dependents may be able to continue drawing payments.

Statutory Provident Fund(SPF) or General Provident Fund (GPF) is maintained by Government and Semi-Government organizations. The Government employee contributes a certain amount of salary to this fund. The accumulations in this fund are paid to the Government employee at the time of retirement or superannuation.

Every Government employee can have this account but the GPF is not available to the private sector employees. This fund can be used to draw advances known as GPF advances which are interest-free and are to be repaid in monthly instalments. There is no bar on the number of GPF advances. This fund matures at retirement or superannuation.

Taxation of SPF before Budget 2021

Before the Proposed Budget 2021, the below mentioned tax exemptions were available for Statutory Provident Fund:

  • Employer’s contribution to provident fund
  • Interest credited to provident fund
  • Lump-sum payment at the time of retirement or termination of service.

What changes were brought by Budget 2021 in taxation of SPF?

In Budget 2021, it has been proposed that the exemption shall not be available for the interest income accrued during the previous year on the recognised and statutory provident fund in the account of the person to the extent it relates to the contribution made by the employees in excess of Rs. 2,50,000 in a previous year.

These amendments will take effect from 1st July, 2021.

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