Budget 2021 has restricted avenues for tax-free returns for middle-class taxpayers. From April 1, returns on investment of more than Rs 2.5 lakh in two of the most popular instruments — provident fund and unit linked insurance plan (ULIP) — will be taxed. This, say industry sources, will bring ULIPs on a par with mutual funds, doing away with the edge they have had since 2018 when long term capital gains was introduced.

With this amendment, return on investment up to Rs 2.5 lakh in PF will remain tax-free while the return on the portion exceeding that amount will be treated as income in the investor’s hand. In case of ULIP, if the investment in a year exceeds Rs 2.5 lakh, the investor will not get the benefit of tax exemption at all. The entire income will be taxed at the rate of 10% plus surcharge, treating the ULIP as an equity-oriented investment plan.

To enjoy the tax-free benefits of ULIP, investors have to buy a policy where the annual premium is not more than 10% of the sum-assured. Though the term of ULIP is 10 years, one can get the pre-maturity tax-free amount after five years of the policy being enforced. The new provisions in both schemes apply from February 1, 2021. ULIPs issued up to January 31, 2021 would remain unaffected.