Take a fresh look at your lifestyle.

Should You Invest in ULIP After New Tax Proposal in Budget 2021?

A vital part of our life involves building a financial net. With a financial plan in place, you can achieve your financial goals and ensure your family’s well-being. With the help of financial and investment planning, you can work towards achieving your dreams while also securing your family’s future.

Among the many instruments available for individuals, ULIPs are considered one of the best. These plans provide the policyholders with insurance coverage along with market-linked returns on investments. They are quite optimal for building a financial corpus along with ensuring the safety of your loved ones. However, individuals must learn about the latest taxation laws before purchasing these plans.

Tax proposal for ULIPs in Budget 2021:  

The latest tax proposal in Budget 2021 has made ULIP investors a bit worried about their investments. Investors who come under the higher income tax bracket generally opt for a ULIP plan since they get tax benefits under Section 10(10D) of the Income Tax Act, 1961, on the maturity benefits and the opportunity to gain high returns through equity investments.

However, the Finance Ministry has scrapped the tax-free status of the maturity benefits and added a few conditions for investors to continue receiving tax-exempt returns. Let’s see how the new tax laws on ULIPs work.

What has changed for the taxation on ULIPs?

As per the latest tax laws, if the annual premium amount for the ULIP investment is higher than Rs. 2.5 lakhs, the plan’s returns will no longer be tax-exempt. Under Section 10(10D), the tax exemption will be available only for the maturity returns on ULIP plans that have an annual premium of up to Rs. 2.5 lakhs.

In the event a ULIP policy has an annual premium higher than Rs. 2.5 lakh, the income or returns gained through maturity will be treated as Long Term Capital Gains (LTCG ) and will be accordingly charged under Section 112A, which deals with LTCG taxation. But, the cap of Rs. 2.5 lakh on annual premiums of ULIP is applicable only for the plans purchased after 01.02.2021.

The latest taxation rule is applied only to the latest ULIP plans. Therefore, policyholders who already own the plans can continue investing in the premium till the plan reaches maturity. But, in the event of new ULIPs, purchasing multiple plans will also not be a feasible plan. If the premium is payable for more than one ULIP, the aggregate premium amount for both policies must be considered for comparing with the limitation of Rs. 2.5 lakhs.

The latest tax treatment of ULIPs with premium amounts above Rs. 2.5 lakh:

The latest tax proposal makes the treatment of ULIPs that don’t get tax exemption just like equity mutual funds. But what would happen to the debt investments made through ULIPs?

Experts have said the proposal might mean that the debt fund/investment portion in ULIPs may be treated just like equity mutual funds. Budget 2021 will change the meaning of ‘Equity-oriented Fund’ in Section 112A. High premium ULIPs will be considered under Equity Oriented Fund even if a part of the fund is invested in debt-based schemes. The meaning of equity-oriented funds is also applied for Section 111A.

The LTCG benefits (mainly gains higher than Rs. 1 lakh) will be taxed at the rate of 10% without the indexation under Section 112A. Along with this, the complete amount of short-term capital returns will be taxed at the rate of 15% under Section 111A. Any ULIPs held for more than a year will be considered a long-term capital asset, and if they’re held for less than a year’s time, they’ll be considered short-term capital assets.

If the policyholder switches between their investment instruments, no tax implications would arise because of these switches. However, the redemption or maturity of units will be exempt from Section 10(10D). If no such exemption is provided for the excess premium or high-premium plans, the switches between the funds may be taxable under head capital gains.

So, should you still invest in ULIPs after the significant tax changes?

One word answer – Yes!

Till now, ULIPs enjoyed an exempt-exempt-exempt status. This entailed:

  1. The premiums paid for a ULIP policy were tax-deductible under Section 80C of the Indian Income Tax Act.
  2. The maturity payouts of the ULIPs were tax-exempt under Section 10(10D) of the Act.
  3. The death benefits payable to the beneficiaries of the insured were tax-exempt under Section 10(10D) of the Act.

Now, after the budgetary changes, some investors might be disheartened by the taxation on the maturity benefits. But remember that the tax will be applicable only if the total annual premium exceeds Rs. 2.5 lakhs. So, for policies where the annual premium is below Rs. 2.5 lakhs, the ULIPs will still enjoy an exempt-exempt-exempt status.

Even for policies above the Rs. 2.5 lakh bracket, you still enjoy attractive tax benefits for the premiums paid. Additionally, you get the dual benefits of life insurance and market-linked investments under a single plan.

Thus, despite the major taxation changes, ULIPs continue to be an attractive investment solution.

Summing Up

ULIPs are excellent additions to your investment planning and achieving your long-term financial goals. However, you must learn about the latest tax laws related to ULIPs. Learning about these laws will help the policyholder plan their insurance investment better.

Comments are closed.