Questions Related to New Rule Around ULIP Taxation

Questions Related to New Rule Around ULIP Taxation 1

When you plan goals at different stages of life, you need to have a good corpus amount to fulfil them. While you are working, your aim would be to maximise your savings for the future. However, relying solely on savings will not to be enough to accomplish your goals. Therefore, it is vital that you invest some part of your income from an early stage to grow your wealth, and in the process, safeguard your savings as well.

ULIP is one such financial instrument that you can use not just to enjoy investment but also insurance. There are tax concessions that you get to enjoy with ULIPs. However, changes have been made recently to the tax rules surrounding them. So, what are these new rules? How do they impact you? Read more to find out.

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What is a ULIP?

A ULIP is a type of life insurance policy that provides you with dual benefits of investment and insurance in the same policy. Via investment, you get to invest in equity funds, debt funds or balanced funds. Equity funds are high-risk, high-return funds; debt funds are low-to-medium risk, medium-return funds. Balanced funds are a mixture of both.

Via the insurance aspect, life cover is provided to the family of the policyholder. If the policyholder passes away during the term of the policy, the insurer will compensate the family with a death benefit.

What are the new tax rules related to ULIPs?

In the Union Budget for the year 2021-22, the Government of India bought many changes related to the taxation of ULIP, meaning, the old rules were no longer applicable. The following are the changes:

  1. If the premium of your policy does not exceed Rs.2.5 Lakhs, the premium is eligible for tax deductions under Section 80C of the Income Tax Act.
  2. If you have more than one policy, the premium of both the policies combined should not exceed Rs.2.5 Lakhs in order to gain tax deduction on it.
  3. If you had to claim tax deduction for one policy at a different point of time and on the second one at a different point, the premium limit should not be exceeded.
  4. If the premium limit does exceed beyond Rs.2.5 Lakhs, the maturity benefits you receive from your new policy will not be eligible for tax deductions under Section 10(10D) of the Income Tax Act.
  5. If you surrender your policy or it matures, the gains received from it would be taxed if they are not eligible for tax deductions.
  6. The taxable gain is calculated by calculating the difference between the amount you would gain, and the premiums paid till the point of surrender or maturity.
  7. If 65% of your investments in ULIPs are in equity funds, they would be taxed in the same manner as equity mutual funds.
  8. If the investment in equity is below 65%, they would be taxed in the same manner as non-equity mutual funds.
  9. The long-term capital gain (L.T.C.G) tax on returns you gain after 1 year of holding period would be 10%.
  10. If there are gains earned during the holding period of 1 year, the LTCG tax would be 15%.
  11. For non-equity ULIPs, the holding period is 3 years.
  12. The gains after the holding period are taxed at 20%, whereas the gains during the holding period are taxed as per the appropriate tax slab.

What do these new rules mean for you?

While the tax deduction limit for premiums was previously less, the increase means that you can invest in more than 1 policy. However, you need to keep in mind that premium for your policies should not exceed the premium limit, or your maturity benefits will reduce once they get taxed.

These are the new tax rules for ULIPs. To get more in-depth information about them and to know more about the benefits of ULIP, you can get in touch with your insurance advisor.