When you plan goals at different stages of life, you need to have a good corpus amount to fulfill them. While working, you would aim to maximize your savings for the future. However, relying solely on savings will not be enough to accomplish your goals. Therefore, you must invest some part of your income from an early stage to grow your wealth and, in the process, safeguard your savings as well.
U.L.I.P. 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 U.L.I.P.s. 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.
What is a U.L.I.P.?
A ULIP is a life insurance policy that provides you with dual benefits of investment and insurance in the same approach. You can invest in equity, debt, 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 policyholder’s family. If the policyholder passes away during the policy term, the insurer will compensate the family with a death benefit.
In the Union Budget for the year 2021-22, the Government of India bought many changes related to the taxation of U.L.I.P., meaning the old rules were no longer applicable. The following are the changes:
- If the premium of your policy does not exceed Rs.2.5 Lakhs, the tip is eligible for tax deductions under Section 80C of the Income Tax Act.
- If you have more than one policy, the premium of both policies should not exceed Rs.2.5 Lakhs to gain a tax deduction. The premium limit should not be exceeded if you had to claim a tax deduction for one policy at a different time and on the second one at another point.
- Suppose the premium limit exceeds Rs.2.5 Lakhs. In that case, 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.
- If you surrender your policy or it matures, its gains will be taxed if they are not eligible for tax deductions.
- 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.
- If 65% of your investments in U.L.I.P.s are in equity funds, they would be taxed similarly to equity mutual funds.
- If the investment in equity is below 65%, they would be taxed in the same manner as non-equity mutual funds.
- The long-term capital gain (L.T.C.G.) tax on returns you gain after one year of holding would be 10%.
- If gains are earned during the holding period of 1 year, the L.T.C.G. tax would be 15%.
- For non-equity U.L.I.P.s, the holding period is three years.
- The gains after the holding period are taxed at 20%, whereas the progress during the holding period is 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 you can invest in more than one policy. However, it would be best to remember that your policies’ compensation should not exceed the premium limit, or your maturity benefits will reduce once they get taxed.
These are the new tax rules for U.L.I.P.s. To get more in-depth information about them and to know more about the benefits of U.L.I.P., you can get in touch with your insurance advisor.