Unit-Linked Insurance Plans (ULIPs) bring together the benefits of life insurance and wealth build-up. Purchasing a ULIP plan meaning is to secure the future of your family along with creating a substantial fortune through flexible investment avenues. With ULIPs, you can instruct the insurance provider to put your money in equity, debt, or a combination of funds, depending on your needs and risk-taking capability.
These ULIP tax benefits make the policy a popular choice in India:
- Section 80C of the Income Tax Act, 1961 offers a deduction of up to INR 1.5 lakh on the premium paid
- Section 10(10D) of the Income Tax Act, 1961 makes the maturity benefit from the ULIP tax-free if your yearly premium is less than or equal to 10% of the sum assured
Budget 2021 has proposed to change the Section 10(10D) rule. If you bought a ULIP after or on February 1, 2021, and pay more than INR 2.5 lakh as an annual premium for the policy, its payouts will now be taxed. This makes ULIPs similar to mutual funds when it comes to the taxation of long-term capital gains. However, the death benefit of ULIPs remains tax-free.
The proposal has resulted in some confusion among investors. Here, we clear these doubts by answering the most common questions regarding the new tax regime.
- What if I have multiple policies?
The new tax rules only affect individual ULIPs. The fourth condition of Section 10(10D) suggests that if you have a ULIP issued after or on February 1, 2021, you will have to pay tax on its proceeds if the annual premium is above INR 2.5 lakh. This applies to only individual policies, as there is also a fifth condition in Section 10(10D), which treats each ULIP separately in terms of taxation.
For instance, if you have purchased two ULIPs, you pay over INR 2.5 lakh in premium for one of them but a lower amount for the second one. In this case, you have to pay a tax on the returns only for the first ULIP. You can still enjoy tax-free income from the second policy. While buying multiple policies, using a ULIP plan calculator will be useful. It can aid you in comparing policies. It can help you determine how much premium you have to pay for each policy.
- How and when will the capital gain be taxed?
Many investors are not sure if the ULIP gains can be taxed if they pay less than INR 2.5 lakh as a yearly premium for a certain number of years, and this amount exceeds only in one year. The new tax rule states that the taxation will be applied based on all the premium payments during the policy’s entire tenure. Hence, if you pay below INR 2.5 lakh as an annual premium for five years and over INR 2.5 lakh only in the sixth year, the pay-outs will still be taxed.
- Will I still have to pay tax if I invest only in debt funds under ULIP?
ULIPs allow you to choose whether to invest in equity or debt funds. As the capital gains tax is only applicable to equity-based investment instruments, you might wonder if investing solely in debt funds will help you save tax.
This is one question where the experts are divided. Some believe that ULIP tax benefits will differ based on whether you put your capital in equity or debt funds. However, some experts think that the new tax rule will not distinguish ULIPs depending on your preference. We will have to wait a little longer to get a definitive answer.
In any case, ULIP plans remain a useful investment option, as they offer the added benefit of a life insurance cover. Using a ULIP plan calculator, you can ascertain if the policy’s returns meet your expectations before investing in one.