Living, working and employing in India comes with various benefits for employers and employees alike.

For example, one of India’s most popular investment schemes is the Unit Linked Insurance Plan, or ‘ULIP’. ULIPs are long-term financial plans that serve two financial goals: they act as both an investment opportunity and provide life insurance for employees in India. Employers can offer to set up and contribute towards a ULIP scheme for their employees.

All premium payments and withdrawals were previously tax-free — meaning people often took advantage of the scheme. However, this all changed in 2021. So, employers need to be aware of how much they’re paying into their employees’ ULIPs, and what (if any) proportion is taxable…

A multifaceted investment

As a ULIP policyholder, regular premium payments must be made that cover both the life insurance coverage and the investment. If the policyholder dies, the beneficiaries receive various payouts.

As a rule, any premiums a person pays into their ULIP fund are deductible from their taxable income under Section 80C of the Income Tax Act 1961. These returns are also totally tax-free, subject to Section 10D of the 1961 Act. Employees can choose how much and how often they pay into the fund, after which some of the money goes towards life insurance and the larger proportion channels the capital into debt or equity funds.

The deduction under Section 80C is the most common and has a limit of INR 150,000 each year. Employees must provide proof of investment under Section 80C for their employer to submit to the relevant tax authorities. This proof is to come in the form of premium receipts paid during the current financial year in the name of the policyholder, their spouse or child.

Until the 2021 Budget, all maturity proceeds of ULIPs were tax-free. However, India’s Central Board of Direct Taxes (CBDT) set new regulations around the ULIP tax exemptions to curb those using the ULIPs for the wrong reasons. The new rules have been in place since February 2021. However, clarity on how to calculate the taxable and untaxable elements of ULIP fund proceeds in various scenarios was released by the CBDT on 19 January 2022.

Tackling tax avoidance

In February 2021, the tax exemption on maturity proceeds of ULIPs was removed. Any maturity proceeds received after 1 February 2021 are now no longer tax-free under Section 10(10D) of the Income Tax Act 1961 if the policyholder’s annual ULIP premium exceeds INR 2,500,000. If a policyholder has multiple ULIPs, the aggregate premium of all ULIPs mustn’t exceed INR 2,500,000.

Now, proceeds are taxable at par with mutual funds and are treated as capital gains if the premium exceeds the threshold. It’s worth noting that any policies already active prior to 1 February 2021 are unaffected, and the tax-free benefit is still available.

Additionally, any long-term capital gains calculated on the proceeds of ULIPs issued on or after 1 February 2021 are taxable at 10%.

Whilst the tax exemption has now been in place for over a year, information has been released on how to calculate the correct tax. To arrive at the capital gains figure, the total premium paid to date should be deducted from the income received to date.

A win-win scenario

From an employee’s perspective, there are an abundance of advantages to paying into a ULIP. Dozens of different ULIPs are available with distinct benefits and features, offering flexibility over investment options and the policy’s tenure. Typically, employees utilise their ULIP for retirement planning, paying for their child’s education, or medical benefits.

As a business, you can offer to pay some or all of the scheduled contributions into an employee’s ULIP fund. Any premiums you choose to pay aren’t taxable (so long as they don’t exceed INR 2,500,000 annually) under Section 37(1) of the Income Tax Act.

Offering to contribute to a ULIP is an effective way to gain loyalty and enhance the satisfaction of your employees, boosting your company’s employee turnover rate. What’s more, if your employees are motivated and feel loyal to your business, their productivity is likely to increase.

Employers contributing towards an employee’s ULIP will also be viewed as truly caring for their employees. As a result, you’re likely to attract India’s top talent and stay competitive in a busy market.

With so many different options available and new laws coming into force regularly around ULIP tax exemptions, a global payroll provider could be the solution you need. Take advantage of TopSource Worldwide’s expert payroll outsourcing services in India to remove any hassle of running payroll in India.

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Published On: 04/04/22Last Updated: 14/09/22

About the Author: Sachin Disa

Sachin heads the India Payroll business unit and is responsible for global sales into India, India domestic sales and delivery, and local finance support in India. Sachin has over 17 years of experience with the company, his previous roles include head of UK payroll operations, head of accounting support services, head of sales in India and VP of finance.

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