The Central Board of Direct Taxes (CBDT) has reduced the tax exemption limit on Unit Linked Insurance Plans (ULIP) for the financial year 2021-22, giving a big blow to the income tax payers. The board has fixed the limit of premium of ULIPs for income tax exemption at Rs 2.5 lakh in a recently issued circular. Taxpayers paying premium above this will have to pay Long Term Capital Gains (LTCG) tax. 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.
CBDT has said in the guidelines issued under Section 10(10D) of Income Tax that the total premium cap should not exceed Rs 2.5 lakh for computing tax exemption on ULIPs after 2020-21. Actually, ULIP is the most used option for income tax exemption as it offers double tax exemption. Firstly, when insurance is purchased, its premium is tax exempted under section 80C of Income Tax. It can be maximum Rs 1.5 lakh. The second exemption is available on the sum assured on insurance under section 10(10d) of Income Tax, on which some special rules also apply. The government has changed this rule, which will affect the tax exemption limit.
What does the new law say
The Finance Act 2021 states that if the total premium of a ULIP exceeds Rs 2.5 lakh annually, then the sum assured on it will be taken out of the purview of income tax exemption. It is clear that if a taxpayer has paid a premium of more than Rs 2.5 lakh in ULIPs in the last financial year, then he will be given full exemption in 80C but the benefit of exemption under 10(10D) will end. The amount of Sum Assured will also include the money received as bonus.
This policy will not be affected
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 its future sum assured as before. Thereafter, the maximum limit of premium will be applicable on all ULIPs purchased. If the taxpayer buys more than one policy, then it will be calculated by adding the total premium of all the policies. For example, if someone has purchased a small number of policies in which the premium of each may be less than 2.5 lakhs, but if all of them together exceed this limit, then the taxpayer will be able to get tax exemption on only that policy whose total premium does not exceed 2.5 lakhs. Ho.
Understand the math of tax exemption like this
Suppose a person has purchased x policy before 1st February 2021, whose annual premium is more than 2.5 lakhs. On maturity of this policy in 2030, he will get tax exemption on the total amount received including bonus as Sum Assured. Now if the same person has purchased three ULIPs A, B, C after 1st February 2021, in which the premium of each may be less than Rs 2.5 lakh but by adding them the total premium becomes more than this, then the taxpayer will be eligible for only those policies. Tax exemption will be available on the assured whose premium will be less than 2.5 lakhs. For example, if the premium sum of ULIPs A and B is less than 2.5 lakhs but exceeds it once C is added, the taxpayer will be able to claim tax exemption on the sum assured amount of the first two ULIPs. Long Term Capital Gains (LTCG) tax will have to be paid on the balance amount minus the premium amount in the third ULIP sum assured.
Full exemption will be given in this case
If the life insured dies before the policy maturity, then his family will be given tax exemption on the entire amount received as Sum Assured. Even if the premium of this insurance is not more than the limit of 2.5 lakhs.