Finance Minister Nirmala Sitharaman announced tax exemption on maturity proceeds of Unit-Linked Insurance Plan (ULIP) will be available only if the annual premium is lesser than Rs 2.5 lakh. The amount received on death, by the nominee, however, will continue to remain exempt without any limit on the annual premium.
This news was met with mixed reactions in the insurance industry.
"Tax exemption for maturity proceeds of ULIPs under section 10(10D) for annual premiums up to Rs 2.5 Lakh continues. For annual premiums over Rs 2.5 lakh for ULIPs, death benefit continues to be tax-exempt. For an annual premium above Rs 2.5 lakh for ULIPs, the maturity benefit will now be taxed as capital gains. Thus, the budget endeavours to selectively bring in taxation parity between life insurance companies and mutual funds," said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance.
"No changes in the direct tax regime has led to stability in the tax environment and gives us confidence that the economy is on the cusp of a recovery."
Some felt the move has reduced the competitive advantage of ULIP.
The government has announced an increase in FDI for the insurance sector from 49 per cent to 74 per cent, which is a positive move and will help in the growth of the sector. However, the move on taxation change for ULIPs (of higher ticket size; an annual premium of more than Rs 2.5 lakh) would have an impact on such investments. Tax benefits remain in the event of the death of the life assured or in the case of ULIP policies where the annual premium is Rs 2.5 lakh or below. This tends to reduce the competitive advantage that ULIPs enjoyed as compared to other short-term investment vehicles.
"The move to remove the exemption for ULIP plans where the premium is greater than Rs 2.5 lakh per annum could impact flows in the segment where ICICI Pru and SBI Life have the highest share,” said Prayesh Jain, Lead Analyst - Institutional Equities at Yes Securities.