Are ULIPs Taxable Like Mutual Funds? Budget 2021 Update

Are ULIPs Taxable Like Mutual Funds? Budget 2021 Update

Hi there

Until last year many people invested in ULIPs (Unit Linked Insurance Plans) to make the most of the tax benefit that one would get from it. They gave you insurance and investment benefits along with no taxation. However, this loophole is now covered in Budget 2021, which has made ULIPs taxable.

However, to bring equality between ULIPs and Mutual Funds, during the Budget 2021, the Finance Minister proposed the changes in the taxation of ULIPs. Let us take a look at the new taxation rules of ULIPs.

Taxation of ULIP

There are three aspects of taxation that we have to consider while investing in ULIPs.

1. At the time of Investing
2. When you surrender or ULIPs mature
3. At the time of death

1. Tax deduction at the time of Investing

This is still applicable up to INR 1,50,000 per annum towards your premium for ULIPs under section 80C of the Income-tax Act,1961. You can claim a deduction for the investment made for himself, spouse, or children (dependent or independent) and HUF can claim a deduction for the investment made for any member of HUF.

The deduction under section 80C is restricted to 10% of the sum assured. It means suppose the sum assured is Rs.10 Lakh, then the premium that you pay under the ULIP should be up to the maximum of Rs.1,00,000. If the premium is beyond 10%, then it is not eligible for deduction under Sec.80C. Only INR 1,00,000 will be eligible for deduction.

One more important point to understand here is that, If you stop the premium payment before the expiry of five years or you terminate your participation by notice to that effect, the aggregate of deductions allowed to you in the earlier years shall be considered as your income and will be chargeable to tax in the year in which such termination or cessation occurs as per your income tax slab.

Do remember that you can pay the premium as much as possible. However, the benefit in Sec.80C is limited to Rs.1,50,000 a year and the premium must be 10% of the sum assured.

2. Taxation at the time of Maturity

This is where the budget has made a change

Before the Budget 2021

Any sum received under ULIP including the bonus on such policy was not taxable (exempt) under section Section 10(10D) of the Act. However, if the premium payable for any of the years during the term of the policy exceeds 10% of the actual sum assured, then no exemption is allowed.

After the Budget 2021

Effective from 1st February 2021, no exemption is allowed under Sec.10(10D), if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000.

However, if the total premium payable during any financial year is less than Rs.2,50,000 (including all the multiple policies), then you still enjoy the tax-free maturity benefits under Sec.10(10D).

The budget 2021 states that any amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to tax under the head “Capital gains” in the previous year in which such amount was received.

The manner in which the income will be taxed is not yet notified.

Under ULIPs you have the option to select if you are investing under the debt funds or the equity funds, now given the taxation of debt and equity is different there was a question on how your gains from ULIPS be taxed. In the Finance Budget 2021, it is proposed to cover ULIPs to which exemption under Section 10(10D) does not apply on account of the applicability of the fourth and fifth proviso thereof. Thus, the high premium ULIPs shall be considered as Equity Oriented Fund even if a portion of the fund is invested in the debt-based scheme.

Thus, the long-term capital gains, in excess of Rs. 1,00,000, shall be taxable at the rate of 10% without indexation under Section 112A. Whereas the entire amount of short-term capital gains shall be taxable at the rate of 15% under Section 111A. The ULIPs shall be considered as a long-term capital asset if they are held for more than 12 months and short-term capital assets if held for 12 months or less.

One more important aspect to consider here is the taxation about the switching. As of now, switching from one fund to the other provided the maturity/redemption of units of ULIPs are exempt under Section 10(10D). However, as per the new proposal, if the premium is more than Rs.2,50,000, then they are not eligible to claim the exemption under Sec.10(10D). In such a situation, we have to wait for clarity about the taxation on switching of the policies whose premium is more than Rs.2,50,000.

3. Taxation of ULIPs at death

In the event of the death of the policy-holder, the exemption shall not be denied under Section 10(10D) from either of the policy, that is, excess premium policy (more than 10% of sum assured) or higher premium policy (more than Rs. 2,50,000).

Hence, irrespective of the premium amount, the death benefit is always tax-free in the hands of the nominee.

If you are considering investing in ULIPs now, ensure that you account for taxation of the same going forward.

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Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

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Income-Tax Relief For Home Buyers

Hello fellow investors

As a part of various relief measures taken by the Government in response to the economic slowdown post-COVID-19, the Finance Minister (FM) has announced a very attractive income tax relief for home buyers (new residential properties of value up to Rs 2 crore). Here is what you need to know.

Income Tax relief for home buyers

In case the declared purchase consideration of the land/building is less than the stamp value (circle rate) by up to 20%, there will be no additional tax outgo for both the seller and the purchaser for the period 12th November 2020 to 30th June 2021. Earlier, the acceptable difference was 5% which was to be enhanced to 10% with effect from 01 st April 2021.

This move will also help developers in selling off their unsold inventory at up to 20% below the circle rate and the buyers in getting cheaper homes without any additional tax burden on either party. Let’s look at the relevant provisions of the Income Tax Act to understand the applicable tax relief.

Section 43CA of the Income-tax Act - for the seller

This section provided for deeming of the stamp duty value (circle rate) as sale consideration for the transfer of real estate inventory in the case the circle rate exceeded the declared consideration. The circle rate is the minimum rate per unit area fixed by the state governments for the sale of land or property and is
aimed at reducing stamp duty evasion by declaring lower sale values in the sale-purchase deeds.

Thus, even if the real estate was sold at a price below the circle rate, the circle rate was considered as the sale value for the calculation of the business profits of the seller. For example, if a house is sold by a developer for Rs 80 lakh but its value as per the circle rate is Rs 96 lakh, the developer is supposed to take Rs 96 lakh as the sale value for
calculating his profit.

Through Finance Act 2018, a difference of 5% between the two rates was declared to be acceptable. This was increased to 10% through Finance Act 2020. Now, the FM has raised this acceptable difference to 20%. Thus, in the above case, the difference is exactly 20% as seen below and the developer can consider Rs 80 lakh for calculating his profits from the sale.

Section 56(2)(x) of the Income-tax Act for the buyer

This section is applicable to the buyer and provides for stamp duty value to be deemed as purchase consideration even if the purchase was made at a lower price. As per the above example, the buyer is deemed to have received Rs 16 lakh (the difference between the stamp value and the sale consideration) and was supposed to declare this amount as ‘Income from other sources and pay tax on the same. Now, he will not have to pay any tax if the difference is up to 20% as is the case in the above example.

In summary, this announcement by the FM comes as a major relief to real estate developers who were struggling to offload their inventory due to lower demand in the market. The benefit is applicable, however, only for the primary sale of residential properties and not for commercial and secondary sales.

Income Tax / Insurance / Investments / Making Money / Money tips / Real Estate / Tax - 09/20/2020

Income-tax Rates FY 2019-20 (AY 2020-21)

Before knowing the tax rates, it is very important to understand the terms Financial year (FY) and Assessment Year (AY).

The below-mentioned tax rates/ slab is on the income earned for the period 1 April 2019 to 31 March 2020. FY stands for the 'financial year' which is from 1 April 2019 to 31 March 2020. AY stands for Assessment year which 2020-21.

For individuals, the due date to file the income tax return for the income earned from 1 April 2019 to 31 March 2020 is 31 July 2020. However, this year due to COVID 19 economic relaxations, the due date is pushed to 30 November 2020

Income tax Rates

Tax Rates for Individuals (below 60)

Income Tax Slab (in Rupees)	Tax Rate for Individual Below the Age Of 60 Years
0 to 2,50,000*	Nil
2,50,001 to 5,00,000	5% of total income exceeding 2,50,000
5,00,001 to 10,00,000	Tax Amount of 12,500 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000
Above 10,00,000	Tax Amount of 1,12,500 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000

Tax Rates for Senior Tax Payers between the age of 60 years to 80 years old

Income Tax Slab	Senior Citizens (between 60 years – 80 years)
Up to 3,00,000	Nil
3,00,001 to 5,00,000	5% of income exceeding 3,00,000
5,00,001 to 10,00,000	Tax Amount of 10,000 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000
Above 10,00,000	Tax Amount of 1,10,000for the income up to 10,00,000 + 30% of total income exceeding 10,00,000

Tax Rates for Super Senior Taxpayers above the age of 80 years

Income Tax Slab	Very Senior Citizens of and above 80 years of age
Up to 5,00,000		Nil
5,00,001 to 10,00,000	20% of income exceeding 5,00,000
Above 10,00,000	30% of income exceeding 10,00,000

Important Notes:

The income tax rates are applied to the annual income calculated. Thereafter Surcharge and Cess are added to the tax payable.
- A surcharge is also applicable slab wise. The surcharge is calculated on the Tax amount. If the income is:

Above Rs.50,00,000 and up to Rs.1 crore – then 10% surcharge is applicable
Above Rs.1 crore and up to Rs.2 crore – then 15% surcharge is applicable.

In the Union Budget 2019-20, a new surcharge on income tax for super-rich individuals has been levied. So, individuals earning:

Between Rs.2 crore and up to Rs.5 crore –then 25% surcharge is applicable;
For Above Rs.5 crore – then a 37% surcharge is applicable.

An additional Cess of 4% for Health & Education is applicable to the income tax plus surcharge.
Section 87A allows tax rebates to Individuals whose total annual income falls below Rs.5,00,000. The rebate is limited to Rs.12,500 or the actual tax amount whichever is lower.

Income Tax Slabs for HUF

The Income Tax Slab for Hindu Undivided Family (HUF) is the same as the Tax slabs for Individuals under the age of 60 years in the year 2019 – 2020.

Income Tax Slabs for Partnership Firms

There is a flat tax rate for Partnership Firms and LLPs (Limited Liability Partnerships) and they are to pay Income Tax at the rate of 30%.

Added to the tax amount is:

Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
Cess for Health & Education: is at the rate of 4% - calculated on tax amount plus surcharge

Income Tax Slabs for Local Authorities

Local Authorities to are to be taxed at a flat tax rate of 30%.

Added to the tax amount is:

Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
Cess for Health & Education: is at the rate of 4% - calculated on tax amount plus a surcharge.

Income Tax Slabs for Domestic Companies

Domestic Companies have received a boost. With the turnover raised from 250 crores to 400 crores for a tax rate of 25%. The turnover slab wise tax calculation is:

Turnover Particulars	Tax Rates
Gross turnover up to 400 Cr. in the previous year	25% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)
Gross turnover exceeding 400 Cr. in the previous year	30% (subject to conditions as set out in the Taxation Laws Amendment Ordinance, 2019)

Added to the tax amount is:

Surcharge on tax:

7% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
12% in cases where the annual income is more than Rs.10 Crore

Cess for Health & Education: is at the rate of 4% - calculated on tax amount plus surcharge

Income Tax Slabs for Foreign Companies

Foreign Companies are taxed at a rate of 40%.

Added to the tax amount is:

Surcharge on tax: 2% in cases where the annual income is between Rs.1 Crore to Rs.10 Crore
5% in cases where the annual income is more than Rs.10 Crore
Cess for Health & Education: is at the rate of 4% - calculated on tax amount plus surcharge

Income Tax Slabs for Co-operative Societies

Income Tax Slab	Income Tax Slab Rate
Up to Rs.10,000	10% of Income
Rs.10,000 to Rs.20,000	20% of Income exceeding Rs.10,000
Over Rs.20,000	30% of Income exceeding Rs.20,000

Added to the tax amount is:

Surcharge on tax: 12% in cases where the annual income is more than Rs.1 Crore
Cess for Health & Education: is at the rate of 4% - calculated on tax amount plus surcharge
So, to calculate your tax liability for the year, you should keep a track of your annual income to know what Income slab you will be falling under for the year 2019 – 2020.

Income tax rates for a non-resident - Individuals

Income Slabs	Income-tax rates
Up to 2,50,000	Nil
From 2,50,000 to 5,00,000	5%
From 5,00,000 to 10,00,000	20%
Above 10,00,000	30%
Ø Surcharge: 10% of tax where total income increases Rs. 50 lakhs 15% of tax where total income increases Rs. 1 crore
Ø Health & Education cess: 3% of tax plus surcharge

Capital Gains Taxation on Mutual Funds/Direct Equity

For Equity Oriented Schemes/Direct Equity

Long Term Capital Gains (units held for more than 12 months)
Short Term Capital Gains (units held for 12 months or less)

For non-equity oriented schemes

Long Term Capital Gains (units held for more than 36 months)
Short Term Capital Gains (units held for 36 months or less)

	Individual/ HUF	Domestic Company	NRI
Equity Oriented Schemes/Direct Equity
Long term capital gains	10%*	10%*	10%*
Short term capital gains	15%	15%	15%
Other Than Equity Oriented Schemes
Long term capital gains	20% (after indexation)	20% (after indexation)	Listed - 20% (after indexation) Unlisted - 10% (without indexation)
Short term capital gains	30%^	30%^^/25%^^^	30%^

	Tax Deducted at Source (Applicable to NRI Investors)
	Short term capital gains^$	Long term capital gains^$
Equity oriented schemes	15%	10%*
Other than equity-oriented schemes	30%	10% (for unlisted without indexation) and 20% (for listed)

* Income-tax at the rate of 10% (without indexation benefit) on long-term capital gains exceeding Rs. 1 lakh provided the transfer of such units is subject to STT.

$ Finance (No.2) Act, 2019 provides for a surcharge at:

37% on base tax where income exceeds Rs. 5 crore;
25% where income exceeds Rs. 2 crore but does not exceed Rs. 5 crore;
15% where income exceeds Rs. 1 crore but does not exceed Rs. 2 crore;
10% where income exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore.

Further, "Health and Education Cess" to be levied at the rate of 4% on the aggregate of base tax and surcharge.

@ Surcharge at 7% on base tax is applicable where the income of domestic corporate unit holders exceeds Rs 1 crore but does not exceed 10 crores and at 12% where income exceeds 10 crores. Further, "Health and Education Cess" to be levied at the rate of 4% on the aggregate of base tax and surcharge.

# Short term/ long term capital gain tax (along with applicable Surcharge and "Health and Education Cess") will be deducted at the time of redemption of units in case of NRI investors.

^ Assuming the investor falls into the highest tax bracket.

^^ This rate applies to companies other than companies engaged in manufacturing business who are taxed at a lower rate subject to fulfillment of certain conditions.

^^^ If total turnover or gross receipts during the financial year 2017-18 does not exceed Rs. 400 crores.

Further, the domestic companies are subject to minimum alternate tax not specified in the above tax rates. Transfer of units upon consolidation of mutual fund schemes of two or more schemes of equity oriented fund or two or more schemes of a fund other than equity oriented fund in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains.

Income-tax implications on dividend received by Mutual Fund unitholders

	Individual/ HUF	Domestic Company	NRI
Dividend
Equity oriented schemes	Nil	Nil	Nil
Debt oriented schemes	Nil	Nil	Nil
Rate of tax on distributed income (payable by the MF scheme)**
Equity oriented schemes*	10% + 12% Surcharge + 4% Cess	10% + 12% Surcharge + 4% Cess	10% + 12% Surcharge + 4% Cess
Equity oriented schemes*	= 11.648%	= 11.648%	= 11.648%
Money market or Liquid schemes /debt schemes (other than infrastructure debt fund)	25% + 12% Surcharge + 4% Cess	30% + 12% Surcharge + 4% Cess	25% + 12% Surcharge + 4% Cess
	= 29.12%	= 34.944%	= 29.12%
Infrastructure Debt Fund	25% + 12% Surcharge + 4% Cess	30% + 12% Surcharge + 4% Cess	5% + 12% Surcharge + 4% Cess
Infrastructure Debt Fund	= 29.12%	= 34. 944%	= 5.824%

* Securities transaction tax (STT) shall be payable on equity-oriented mutual funds schemes at the time of redemption/switch to the other schemes/sale of units.

** For the purpose of determining the tax payable by the scheme, the amount of distributed income has to be increased to such amount as would, after reduction of tax on such increased amount, be equal to the income distributed by the Mutual Fund. In other words, the amount payable to unitholders is to be grossed up for determining the tax payable, and accordingly, the effective tax rate would be higher. The above-mentioned rate is without considering the grossing up.

Surcharge mentioned in the above table is payable on base tax. Further, "Health and Education Cess" is to be levied at 4% on the aggregate of base tax and surcharge.

Disclaimer - The tax rates mentioned here are from the Finance Act 2019 and can be subject to changes. It is advisable to consult your tax consultant or financial advisor before finalizing your tax returns.

Income Tax / Salary / Tax - 06/08/2020

Changes in the ITR form for FY 2018-19 (AY 2019-20)

There are many changes which are notified by the CBDT in this year's income tax returns. There are changes for all those who have Income from salary, House property, Capital Gains or company owners. Government is trying to collect more data to increase transparency on how information is disclosed in the income-tax returns.

We have highlighted some major changes here for reference.

Reporting of salary income on a gross basis:

The new ITR forms have changed the mechanism of reporting of salary income. Up to Assessment Year 2018-19, an individual was required to report salary amount excluding all exempt and non-exempt allowances, perquisites and profit in lieu of salary. These items were reported separately in the same schedule and had no impact on the calculation of net salary income.

The new ITR forms have changed this reporting mechanism, which is now in sync with the columns of Form 16 (TDS Certificate issued by the employer). Now, from Assessment Year 2019-20, an individual has to mention his gross salary and the number of exempt allowances, perquisites and profit in lieu of salary shall be deducted or added to arrive at the taxable figure of salary income. Further, the new ITR forms seek separate reporting of all deductions allowable under Section 16, namely:

a) Standard Deduction

b) Entertainment allowance

c) Professional tax

Investment in unlisted companies:

Where a company issues shares at a price which is less than its FMV and the difference between the FMV and issue price exceeds Rs. 50,000 then the difference is charged to tax in the hands of the shareholders under the head income from other sources.

In order to keep a check on the issue of shares by a closely held companies and investment made therein by shareholders, a new table has been inserted in new ITR forms to seek the following details in respect of unlisted equity shares held at any time during the previous year by an assessee:

a) Name of the company

b) PAN of the company

c) No. and cost of acquisition of shares held at the beginning of the year

d) No. of shares, face value, issue price (or purchase price) and date of purchase of shares acquired during the year

e) No. and sale consideration of shares transferred during the year

f) No. and cost of acquisition of shares held at the end of the previous year.

Buyer’s information is required in case of transfer of immovable property:

If assessee reports a capital gain, from the transfer of immovable property, in income-tax return, it would be mandatory for him to furnish the following information about the buyer:

a) Name of buyer

b) PAN of buyer

c) Percentage share

d) Amount

e) Address of property

f) Pin code

It is mandatory for the assessee to furnish the PAN of the buyer in ITR form if tax has been deduced under section 194-IA or PAN is quoted by the buyer in the registration documents.

PAN is otherwise a mandatory document to buy or sell an immovable property if the stamp duty value or the sales consideration exceeds Rs. 10 lakhs.

Classification of house property :

While providing details of your house property in ITR-1, you are required to specify whether the house is – ‘Self Occupied’, ‘Let-out’ or ‘Deemed Let-out.’ In the previous year’s ITR-1, there was no such option of ‘Deemed Let-out‘ in ITR-1. Also, while filing ITR, if there are any rent arrears that are received by you in FY 2018-19 then you have to report them property wise as received.ITR-1 & ITR-2 has introduced an additional row ‘Arrears/Unrealized Rent’ received during the year less 30%

ITR 1 and ITR 4 ask for nature of residuary income:

Up to Assessment Year 2018-19, taxpayers were required to disclose the aggregate amount of income taxable under the head of other sources. However, from Assessment Year 2019-20, it is mandatory for an assessee to specify the nature of income taxable under the head income from other sources and the deductions claimed in respect of family pension in accordance with Section 57. Such extra disclosures have been asked by the Dept. to check that the ineligible persons are not using the ITR 1 and ITR 4 for filing of return.

There is a notification by the Income-tax authorities based on which taxpayers will be required to disclose a break-up of capital gains earned from shares each script-wise. However, the form has not been notified until today and hence, we have not discussed the same here. We will write a separate post on the same.

Wealth Cafe Actionable - These changes have surely increased the back end work and data that will be required to file Income-tax Returns going forward. Do not take these changes lightly and keep yourself updated irrespective of whether you are filing the return by yourself or from a consultant.

Tax - 06/15/2019

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