CBDT rules: If investment in ULIPs exceeds 2.50 lakhs then there is no tax exemption on maturity, know what to do in such a situation

CBDT has reduced the tax exemption limit on ULIPs for 2021-22, giving a jolt to the income tax payers. Under this, if you invest more than Rs 2.50 lakh in a ULIP in a financial year, then the benefit of rebate on Sum Assured on maturity will not be available. Kalicharan’s report tells about investment and tax exemption in ULIP-

10% LTCG to be paid on Sum Assured
Investment advisor Balwant Jain says that on all ULIPs purchased after February 1, 2021, the maximum limit of premium has been imposed at Rs 2.50 lakh. Under this, if a taxpayer invests more than 2.50 lakhs in ULIPs in a financial year, then he will no longer get the benefit of double exemption. This means that such a taxpayer will have to pay 10 per cent Long Term Capital Gains (LTCG) tax on the maturity amount.

However, ULIPs purchased before February 1, 2021 will not be affected by the new rules and taxpayers will be able to claim income tax exemption on the sum assured on its maturity in future as before. Finance Minister Nirmala Seetharaman had made a provision for this in the budget 2020-21 itself, which will be applicable from the current financial year.


Change in 10 10(d)
The CBDT has said in the guidelines issued under Section 10(10D) of Income Tax that the total premium cap for computing tax exemption on Ulips after 2020-21 should not exceed Rs 2.50 lakh.
ULIP is the most commonly used option for income tax exemption. There is a double discount.
When the insurance is first purchased, its premium is exempted under section 80C of the Income Tax Act. It can be maximum 1.50 lakhs.
The second exemption is available on the Sum Assured on Maturity under Section 10(10D).
The government has changed this rule, which will affect the tax exemption limit.

If there is more than one policy, then the total premium will be calculated.
In case of purchase of more than one ULIP, it will be calculated by adding the total premium of all the policies. If someone has purchased several small policies, each of which has a premium of less than 2.50 lakhs, but if all of them together exceed this limit, then the taxpayer will get exemption only on that policy whose total premium does not exceed 2.50 lakhs.


What does the new law say
The Finance Act 2021 states that if the total premium of ULIPs exceeds 2.50 lakh per annum, then the sum assured on it will be out of the purview of tax exemption. It is clear that if a taxpayer has paid more premium than this in ULIP in the previous financial year, then he will be given full exemption in 80C, but the benefit of exemption under 10(10D) will be lost. The amount of Sum Assured will also include the money received as bonus.

Understand the mathematics of investment and tax like this
The taxpayer has purchased a policy before February 1, 2021, whose annual premium is more than 2.50 lakhs. On maturity of the policy in 2030, he will get a rebate on the total amount received including bonus as Sum Assured.
Now if the same person has purchased three ULIPs after February 1, 2021, in which the premium of each one is less than Rs 2.5 lakh but by adding them the total premium becomes more than this, then the taxpayer can take tax exemption only on the sum assured of those policies. Whose premium will be less than 2.5 lakhs.
Suppose, the sum of the premiums of two ULIPs is less than 2.5 lakhs, but on adding the third it becomes more than 2.50 lakhs, then the taxpayer will be able to claim tax exemption on the sum assured amount of the initial two ULIPs. The sum assured of the third ULIP is to be paid as LTCG tax on the balance after deducting the premium.


Full exemption if death before maturity
If the person insured dies before the maturity of the policy, then the entire amount received by his family as Sum Assured will be exempted from tax. Even if its premium is more than the limit of 2.5 lakhs. – AK Nigam, Director, BPN Fincap