What is a ULIP? It stands for a Unit-Linked Insurance Plan, i.e., a life insurance offering that also comes with the benefits of market-linked investments. These are plans where premiums are invested in various market-linked financial instruments (after deducting all applicable charges) for earning future returns. Simultaneously, the policyholder gets a life cover for the duration of the policy term.
However, some changes were introduced in the latest tax regime that will impact the taxation of ULIPs. Therefore, if you have recently invested in a ULIP or are planning to, it will serve you well to be updated with the tax laws that affect your policy. Read on to know more.
What are the tax benefits of ULIPs?
While you can always use a ULIP calculator to work out your future returns, you should also have an idea of their basic tax benefits. These benefits are offered under the purview of various sections of the Income Tax Act of 1961. They may be categorized as follows:
- Section 80C – This offers tax deductions on the premium payments with a maximum amount of Rs. 1,50,000. However, in this case, the premium paid in a year for ULIPs should not be more than 10% of the sum assured upon the policyholder’s death. This applies to ULIPs bought on or post 1st April 2012. For those purchased before this period, the total premium should not cross 20% of this amount, i.e., the death benefit amount assured as per the policy.
- Section 80D – You can deduct premiums under this section by choosing critical illness riders. The premium paid toward the same can be claimed as your tax deduction up to a maximum amount of Rs. 25,000. Those above 60 can also get deductions up to Rs. 50,000 in this case. If you are also paying these rider premiums for your non-senior-citizen parents, then you can get deductions up to Rs. 25,000. If they are senior citizens (above 60), you can claim another Rs. 50,000. In total, you can claim up to Rs. 75,000 as deductions if your parents are not senior citizens. If they are senior citizens (above 60), you can claim up to Rs. 1 lakh in total tax deductions, making it a win-win proposition overall.
- Section 10D – The death benefit of a ULIP is exempted from taxes under this section. The same applies to the maturity amount you receive, although the above conditions apply. This contributes to making ULIPs value-for-money investments.
These are some of the most significant tax benefits that ULIPs provide. You can always use an online ULIP calculator, as mentioned, to determine your overall returns. These are great investment options for investing in achieving your future life goals while getting life insurance coverage at the same time.
What are the changes introduced in the taxation of ULIPs?
Several new changes have been introduced for ULIP taxation in The Union Budget for the financial year 2021. Here is a quick guide:
- Maturity amounts/proceeds from ULIPs bought on or after 1st February 2021 will be taxable under Capital Gains. However, this will apply at the time of making the payment. The tax will be imposed only if the total yearly premiums of the ULIP(s) surpass Rs. 2.5 lakh.
- If one purchases multiple such plans on or after this date, then the annual premium amount of each one should not exceed Rs. 2.5 lakh, while the cumulative annual amount should also be within this amount to avoid capital gains taxes.
- For ULIPs with higher values, taxation will be based on whether they are categorized as equity-based funds. If the fund deploys 65% (maximum) in company equity shares or 90% of proceeds in units of another listed fund, which invests another 90% in turn in listed domestic company equity shares, then it will be taken in this category (equity-based fund).
- Otherwise, these ULIPs will be taken as a unit of any debt-based fund.
What will be the impact of these changes?
These changes are aimed to deter investors from treating ULIPs as tax-saving instruments first and then as investments. So, if you want to buy a Unit-Linked Insurance Plan in the near future, make sure to use a ULIP calculator to help you evaluate the expected returns. This will allow you to determine your tax burden much more accurately.
You might also have to plan your aggregate ULIP premiums to be lower than Rs. 2.5 lakh in a particular year. This isn’t easy if you are looking at deploying large-scale investments in these channels. However, a good strategy and financial planning will help you immensely in this regard.