As per the modified Finance Bill 2021 passed by the parliament on March 23, minimum equity holding norms have been put in place in respect of ULIPs carrying high premiums. The initial Finance Bill laid out that ULIPs with annual premium of more than Rs. 2.5 lakh will not enjoy tax exempt status on maturity proceeds under Section 10(10)(D) of the Income Tax Act, 1961. And these ULIPs will be taxed similar to equity mutual funds.
Also, for such ULIPs with high premium there has been a stipulated minimum equity holding criterion such that they are treated on par with equity mutual funds for capital gains tax. And interestingly, this minimum equity criterion will have to be retained throughout the policy term.
Further as per an expert, the mandate is to have 65% of the ULIPs assets in equity in case the funds are directly invested in stocks or 90% in case the investment in stocks is through the indirect route such as via ETFs. And if the criterion is not met, returns from them will be treated as capital gains from any other asset. So, they will be taxed at individual investor's slab rate if held for a period of less than 3 years and at 20% with indexation if held for a period of more than 3 years.
So, now as long as the individuals are taxpayers discretely, the limit of Rs. 2.5 lakh shall also apply distinctly. And now what needs to be remembered that the benefit shall not be available in case if the dependent's income is clubbed with the taxpayer.
If the premium is payable in respect of more than one ULIPs, the aggregate of such policies will be considered for comparing with Rs. 2.5 lakh threshold. And in a case if the premium of all such ULIPs taken together does not exceeds Rs. 2.5 lakh, you will be offered a tax exemption. Here another condition that applies is that the sum assured is over 10 times the annual policy premium.