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Security Transaction Tax (STT) made applicable on ULIP: Budget 2021

security-transaction-tax-stt-applicable-on-ulip-budget-2021

Finance Bill, 2021 has introduced Securities Transaction Tax (STT) on unit-linked insurance policy (ULIP) from 1st February 2021. Before the amendment, ULIPs were not subject to STT. After the amendment, security  transaction  tax (STT) will be applicable  on  maturity  or  partial  withdrawal  with respect to ULIPs issued by an insurance company on or after the 1st February 2021. STT shall apply only on ULIPs to which exemption under clause (10D) of section 10 of the Income Tax Act, 1961  does not apply on account of the applicability of the fourth and fifth proviso thereto. The rate of STT on ULIP is 0.001%.


    Introduction


    STT was  introduced by Union Budget 2004 presented by the then Finance Minister P. Chidambaram. This securities transaction tax was imposed in lieu of lower tax on the short-term capital gain (STCG) and exemption of  Long-term capital gain (LTCG) tax on equities. STT is levied under Chapter VII of Finance (No. 2) Act, 2004.


    Finance Bill, 2021 proposed to bring high premium ULIPs under tax net by withdrawing the exemption given under section 10(10D) of the Income Tax Act, 1961.



    When STT on ULIP levied


    Sale or surrender or redemption of a unit of an equity-oriented  fund  to  an  insurance  company,  on maturity or partial withdrawal, with respect to unit-linked insurance policy (ULIP) issued by such insurance company on or after the 1st day of February 2021 have been included in the definition of "taxable securities transaction" u/s 97(13)(b) of the Finance (No.2) Act, 2004.


    Rate of STT on ULIP


    The rate of STT on taxable ULIP is proposed as 0.001% on the amount of maturity proceeds.


    Applicable date of STT on ULIP


    It is proposed that STT on high premium ULIPs shall be applicable on sale or surrender or redemption of a unit of an equity-oriented  fund  to  an  insurance  company,  on maturity or partial withdrawal, with respect to unit-linked insurance policy issued by such insurance company on or after the 1st day of February 2021.



    Thus only the ULIP policies issued on or after 01.02.2021 will be subject to STT if the same is eligible for taxation u/s 10(10D). ULIPs issued before 01.02.2021 shall not be subject to STT under any circumstances.


    Which ULIPs are liable for STT


    ULIP refers to those policies which are covered in Explanation 3 of clause (10D) of section 10 of the Income-tax Act, 1961. Thus only the high premium or taxable ULIPs are subject to STT. Those ULIPs which are exempt from income tax u/s 10(10D) will not suffer STT.


    Read more on Taxability of ULIPs after Budget 2021

    Changes in Tax Exemption and Taxability on ULIP


    Who will collect STT on ULIP


    As per amended section 100, an insurance company shall be liable to collect and recover the STT on eligible ULIPs. Such an insurance company shall also be required to furnish annual return with the government.


    Legal Provisions to introduce STT on ULIPs


    Part XII of the Finance Bill, 2021 proposed to amend Finance (No 2) Act, 2004 to make security transaction tax applicable  (STT) on maturity or partial withdrawal with respect to unit-linked insurance policy issued by an insurance company on or after the 1st February, 2021 [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the fourth and fifth proviso].


    Amendments in Finance (No. 2) Act, 2004 are proposed in the following manner in the Finance Bill, 2021-


    PART XII 


    AMENDMENTS TO THE FINANCE (NO.2) ACT, 2004


    Commencement of this Part.


    154. The provisions of this Part shall come into force and shall be deemed to  have come into force on the  1st day of February, 2021.


    Amendment of section 97. 


    155. In section 97 of the Finance Act (No.2) Act, 2004, (hereafter in this Part referred to as the Principal Act),––   


    (i)  in  clause  (13),  in  sub-clause  (b),  for  the  words “Mutual Fund;”, the following shall be substituted, namely:–


    “Mutual Fund; or


    (ba) sale or surrender or redemption of a unit of an equity  oriented  fund  to  an  insurance  company,  on maturity or partial withdrawal, with respect to unit linked insurance policy issued by such insurance company on or after the 1st day of February, 2021;”; 


    (ii)  after  clause  (13),  the  following  clause  shall  be inserted, namely:–

     

    ‘(13A) “unit linked insurance policy” shall have the meaning assigned to it in Explanation 3 of clause (10D) of section 10 of the Income-tax Act, 1961;’


    Amendment of section 98.


    156. In section 98 of the Principal Act, in the Table, after serial number 5 and the entries relating thereto, the following shall be inserted, namely:–


    “5A. Sale or surrender or redemption of a unit [0.001] Seller” of an equity oriented fund to an insurance per company,    on    maturity     or    partial cent. withdrawal,  with  respect  to  unit linked insurance policy issued by such insurance company  on  or  after  the  first  day  of February, 2021 


    Amendment of section 100. 


    157. In section 100 of the Principal Act, after the words “Mutual Fund” wherever they occur, the words “or insurance company” shall be inserted.


    Amendment of section 101.


    158. In section 101 of the Principal Act, after the words “Mutual Fund” at both places where they occur, the words “or insurance company” shall be inserted. 


    Amended Provisions related to applicability of STT on ULIP explained


    Clause 154 and 155 of the Bill seeks to amend section 97 of the Finance Act (No.2) Act,  2004.  


    Chapter-VII of the said Act provides for Securities Transaction Tax. 


    It is proposed to amend sub-clause (b) of clause (13) of section 97 of the said Act so as to include sale or surrender or redemption of a unit of an equity oriented fund to the insurance company, on maturity or partial withdrawal, with respect to unit linked insurance policy issued by such insurance company on or after 1st February, 2021, under the definition of “taxable securities transaction”. 


    It is further proposed to insert clause (13A) to the said section define the expression “unit linked insurance policy”. 


    These amendments will take effect retrospectively from 1st February, 2021.


    Clause 156 of the Bill seeks to amend section 98 of the Finance Act (No.2) Act, 2004.  


    It is proposed to insert serial number 5A and entries relating thereto in the Table in section 98 so to provide that the rate for sale or surrender or redemption of a unit of an equity oriented fund to an insurance company, on maturity or partial withdrawal, with respect to unit linked insurance policy issued by such insurance company on or after 1st February, 2021. 


    This amendment will take effect retrospectively from 1st February, 2021. 


    Clauses 157 and 158 of the Bill seeks to amend sections 100 and 101 of the Finance Act (No.2) Act, 2004.  


    It is proposed to consequentially amend sections 100 and 101 of the said Act so as to include insurance company within their purview. 


    This amendment will take effect retrospectively from 1st February, 2021.



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