Assuming that the new tax law gets passed in the current session of the parliament, the Direct Tax Code will come into effect from April 1, 2012. The new tax law completely changes the kind of tax-break investments that are available to individual investors, the biggest change being that ELSS mutual funds, ULIPs and the NSC will no longer save you any tax.
Of these three, ELSS funds and NSC are not a problem because investors can simply cease investing them, but ULIPs are a different animal altogether. From April 1, 2012your ULIP installments will no longer get you a tax break. Unlike ELSS mutual funds and NSC, there could be a certain cost to ceasing your ULIP policy. For many, if not most ULIP investors, the tax-breaks were one of the motivations for investing in a ULIP. Now, that premise will no longer hold.
You have two options--either you will suffer some kind of loss for stopping your ULIP right away, or you will continue to pay your ULIP installments and dig out extra money for the tax saving investments that are permissible under the new law.
While these options may be OK by the country’s tax laws and the terms under which you were sold the ULIP policy, they are decidedly unfair from a consumer-protection perspective. These policies were sold with tax-breaks as a major characteristic, and now that will vanish. In all fairness, insurance companies should give investors an option to withdraw without suffering any sort of loss. That is something that IRDA should look into.
There is one more problem, and that is of information flow. It is very likely that a certain proportion of ULIP customers will not discover the change in the tax scenario till it’s the end of the tax year. All customers who are invested in a product that was formerly, but any more, tax-exempt should be informed of this change in status and be given an option to opt-out.