Two announcements concerning taxation of investments is going to pinch high-end investors. It is the taxation of gains from Unit Linked Insurance Policies (ULIPs) and interest income from provident fund investments.

Ulips now taxable

Announcement: If you have purchased a Ulip on or before February 1, 2021 with an annual premium exceeding Rs 2.5 lakh, its long-term returns will be taxable in a manner similar to equity mutual funds. Death benefits, regardless, will remain exempt without limitation in the hands of your nominees. Ulips purchased before this date are exempt as are Ulips with annual premiums under Rs 2.5 lakh.

Analysis: In 2018, the introduction of a 10% tax on long-term capital gains (LTCG) from equity had immediately made Ulips attractive in comparison to equity mutual funds. Up to that point, there was no tax on LTCG from equity. Now, both investment options are on a par, at least where taxation is concerned.

Approach: If you were about to invest in a Ulip only to avoid LTCG, your moment has passed. You may now consider investing in open-ended equity funds where you’ll enjoy similar returns without the lock-ins. If you had purchased a Ulip on February 1 and are ruing the decision, you could return the policy in the free-look period and claim a refund. Second, if you are in the market for your first life insurance policy, you should strongly consider purchasing term insurance.

Provident fund interest taxable

Announcement: From April 1, 2021, tax-free interest will be paid only on provident fund contributions that are under Rs 2.5 lakh in a year. If contributions exceed this mark, taxes will apply as per the investor’s tax slab.

Analysis: This will impact high-value investors who contribute upwards of Rs 20,000 a month into their PF account. EPF offers assured returns of 8.5% per annum, well above other fixed income investment options. Naturally, this attracts investors looking for guaranteed returns. The FM in her speech pointed out that there are investors contributing as much as a crore every month.

Approach: If your PF investments exceeded this limit, you may have to consider alternatives. You could of course settle for taxable interest income. Basis the numbers today, a 30% tax on 8.5% returns get you 5.95% post-tax, which is still higher than what a fixed deposit in many large banks would pay. Or you could remain within the limit and find alternatives such as the NPS, Sukanya Samriddhi, or MFs.

What your monthly PF will be from April 2021 also needs to be seen in the light of the new wage code, which says your basic pay must be at least 50% of your total income which would lead to a restructuring of your salary.

Adhil Shetty is CEO of BankBazaar.com