Before this Budget, maturity proceeds of ULIP schemes were tax-free as per section 10(10 D) of the Income Tax Act.
The most important aspect of the Budget 2021 is that there is not any tax hike. Major changes proposed are in ULIP and PF taxation. ULIP is an investment option which also provides life insurance cover. The premium which one pays for ULIP goes partly for insurance cover and a part of it goes towards investments.
Before this Budget, maturity proceeds of ULIP schemes were tax-free as per section 10(10 D) of the Income Tax Act. In the Budget 2021, the exemption of section 10(10 D) has been removed for ULIPs. This means if ULIP is issued after 1st Feb’21 and aggregate annual premium is more than Rs 2.5 lakh, the maturity amount would be taxed at the rate of 10% if its long-term gain (if gain is more than Rs 1 lakh) and at the rate of 15% if it’s short-term gain. For already purchased ULIPs (before 1st Feb’21), these changes are not applicable. This means maturity proceeds will remain tax-free.
Another major change proposed is about taxation of interest on EPF. If employees contribution to EPF is more than Rs 2.5 lakh in that year, the interest would be taxable just like tax on fixed deposits in a bank. These provisions would be applicable from 1st April 2021. The premium paid for ULIPs or contributions to EPF both are eligible for tax saving deduction u/s 80C of the Income Tax Act. Due to tax on maturity for ULIPs and tax on interest of EPF, the post-tax returns of these two investments are reduced.
As per section 80C, one can do maximum tax-saving investments of Rs 1.50 lakh. Most of this bracket is filled by certain tax-saving expenses like school tuition fees, home loan EMI (principle) etc. Therefore, one should ascertain how much tax he has already saved out of this Rs 1.50-lakh bracket. Now one can think of opting for NPS over EPF for two reasons. Firstly, returns in NPS are market linked and so there is the possibility of good wealth creation over long term. Secondly, from last year, lump sum withdrawal (60% of corpus) has been made 100% tax-free.
As far as ULIPs are concerned, one can think of opting for term insurance for purchasing life cover and ELSS for investing for growth. With these changes in the Budget 2021, tax payers should do an informed and wise tax planning.