The Finance Bill 2021-22 has proposed to tax the gains from ULIPs (Unit Linked Insurance Policies) with a premium of more than Rs 2.5 lakh per year. The move will bring parity to ULIPs and mutual funds in terms of taxes.
From 1st February 2021, investing more than Rs 2.5 lakh as premium in ULIP will see the maturity proceeds being taxed identically to mutual funds.
However, death benefit in ULIP will continue to remain tax-free regardless of the premium amount.
This new tax rule applies to the sum of the premium of the ULIPs purchased on or after 1st February 2021.
At present, Long-Term Capital Gains (LTCG) arise out of the sale of units of equity-oriented mutual fund schemes and the gains are taxed at the rate of 10%, if the LTCG exceed Rs 1 lakh in a financial year (gains up to January 31, 2018 being grandfathered).
However, the proceeds from ULIPs of insurance companies (including early surrender / partial withdrawals), are exempted from income tax under section 10(10d) of Income Tax Act, if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in of 5 years.
The above situation led to tax arbitrage in favour of ULIPs, even though ULIPs like mutual funds are also investment products that invest in equity stocks. ULIPs even have an added advantage of tax deduction under Section 80C of the Income Tax Act on the premium paid.
The capital gain tax advantage was being used by many HNIs, and their investments went to ULIPs. With the Budget proposal, there will be some tax parity between ULIPs and mutual funds.
When you sell an asset for a value that is higher than the amount you purchased it for, you incur a capital gain. Assets include equities and property. Non-Resident Indians (NRI) who have assets in India needs to pay taxes on their capital gains. This could be taxes on either Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The definition for STCG and LTCG will differ based on the asset.
Property
When a house property is sold by an NRI after a time of 2 years (reduced from 3 years in Budget 2017) from the date it was purchased, it is considered as LTCG. If the asset has been held for less than 2 years, it will be STCG.
Tax implications will be applicable if NRIs inherit properties on account of legacy. In the event that the property has been inherited, make sure to consider the date of acquisition of the first owner for ascertaining whether it’s LTCG or STCG. In such a case the cost of the property will be the cost of the past owner.
LTCG are taxed at 20% and STCG will be taxed at the pertinent personal assessment tax rates for the NRI. This will depend on the absolute income which is assessable in India for the NRI.
At the point when an NRI sells property, the purchaser is subject to Tax Deducted at Source (TDS) of 20%. If the property has been sold before 2 years from the date of purchase, a TDS of 30% will be applicable.
However, NRIs are permitted to claim exceptions under Section 54 and Section 54EC on LTCG from sale of house property in India.
Exemptions
To claim exemption under Section 54, NRIs need to invest the gains in a house property. Unlike popular perception, you needn’t reinvest all of the sale proceeds in a house property. You need to only invest the LTCG amount to claim the exemption. Your exemption will be limited to LTCG amount.
Note that NRIs can buy the property possibly one year before the sale or 2 years after the sale of the property. NRIs are also permitted to put the gains in the construction of a property. However, the construction must be finished within 3 years from the date of sale.
The house property purchased should be in India for the NRI to claim the exemption. The exemption will not be applicable for properties purchased or constructed outside India.
If you are able to invest your LTCG by the date of filing of your income tax return for the financial year in which you have sold your property, you can deposit the money in a capital gains account. In your income tax return, by claiming this as an exemption from your capital gains you don’t need to pay taxes.
If you can save the tax on LTCG by investing them in certain bonds. These include bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). These bonds have a tenure of 5 years and must not be sold before that. Note that to claim this exemption, you will have to invest the LTCG in the bonds before the return filing date. NRIs are allowed to invest a maximum of Rs. 50 lakhs in a financial year in these bonds.
Mutual Funds
For tax on equity oriented mutual funds purchase by NRIs, LTCG is for investments that are more than 1 year. LTCG will be taxed at 10% if the gains exceed Rs. 1 lakh. STCG tax is 15%.
For debt funds, LTCG is for investments that are more than 3 years. LTCG is 20% with indexation benefit and STCG is 30% if the NRI belongs to the highest tax bracket.
Tax Exemption Certificate (TEC)
If an NRI’s actual tax liability is less than the rate of tax prescribed under the Income Tax Act, the NRI can get a TEC from the income tax department. TEC helps eliminate the need to seek refund and any delays in refund.
NRI will have to write to the Income Tax authorities and the application needs to be sent to the authorities in the same jurisdiction where the NRI holds his/her PAN. If the NRI is purchasing a property to get a tax exemption, the allotment letter has to be submitted to the tax authorities. If there is no allotment letter, NRIs can provide a copy of the payment receipt.
Here are scenarios where the NRI can apply for TEC:
Scenarios
TDS (%)
Actual tax liability (%)
STCG/LTCG on sale of property and re-investment in property/bonds
20%/30%
NIL / Lower than rate applicable
STCG/LTCG on sale of securities
15%/30%
NIL / Lower
Rental income
30%
NIL / Lower
Interest Income on NRO Deposits up to basic tax exemption limit
30%
NIL
The TEC certificate will be binding on the one who is required to deduct tax.
