Revised DTC puts Ulips on tax notice

Proceeds from unit-linked insurance plans (Ulips) are set to be taxed at maturity.

Proceeds from unit-linked insurance plans (Ulips) are set to be taxed at maturity. According to the revised draft of the Direct Tax Code,the government plans to bring these popular investment-cum-insurance products under the tax ambit taking away the biggest charm of these products. The proposed tax will further diminish the real rate of return in case of Ulips and other equity instruments such as mutual funds.

If they (insurance plans) are not pure insurance products they will be taxed. So,all Ulips sold after the DTC comes into effect will be taxed. Policies that have been sold till date will continue to enjoy tax benefits, said a senior official in the revenue department,ministry of finance. The revised DTC has done away with the concept of short- and long-term capital gains tax and proposes to tax all gains made on the sale of equity or equity-related assets.

Loss or gain made on the sale of an asset within a year will be added to the investor’s salary and taxed accordingly. However,in case the asset is held for more than a year,then the loss or gain will factor in a discount rate and then taxed according to the income slab of the investor. While the government is yet to finalise the discount rate,experts suggest that it would be similar to the present indexation rate.

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Long-term capital gains will also be added to income,but after applying a certain discounting rate. So if the discounting rate is 60 per cent,then only 40 per cent of the capital gains are taxable,60 per cent are tax-free. Theres no definite statement on what the discounting rate is. However,the discussion paper gives three illustrative examples using rates of 50 per cent,60 per cent and 70 per cent. I suppose one could take these as the range that we are likely to have, said Dhirendra Kumar,chief executive officer,Value Research.

This means that for investors in the lower tax-slab,the effective long-term capital gains rate could be very low,perhaps around 3-4 per cent. At the highest slab,the effective LTCG rate would be 10-15 per cent.