Unit Linked Insurance Plans, also known as ULIP plans, are an investment alternative that has recently gained greater popularity than other vehicles. The idea of a Unit-Linked Insurance Policy (ULIP) was established in an effort to make insurance plans a little more profitable in terms of rate of return. In this, a portion of the premium was invested for life insurance, while the majority was invested directly or indirectly in the stock market.
This popularity might be attributed to the fact that it combines the benefits of investment and insurance. Additionally, it provides a sizeable tax deduction under section 80C and an important tax exemption under section 10(10D). However, the Finance Act of 2021 made changes to these advantages. ULIPs (Unit Linked Insurance Plans) nonetheless have the potential to be a wise decision for investors.
The ULIP tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
What is ULIP?
A unit-linked insurance plan, or ULIP, is a type of hybrid investment that offers customers the advantages of both investing and insurance. Your premium contribution goes in two distinct directions. You invest in wealth creation in one half, and you are insured in the other. The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Keep in mind that only 10% of the real capital sum assured in the premium is eligible for a tax deduction under section 80C when you invest in ULIPs.
The new ULIP regulations
The Ministry of Finance made it plain in the 2021–22 union budget that the tax regime for high-premium and low-premium ULIPs needed to be different in order to level the playing field for ULIPs. Section 10(10D) now has the fourth and fifth provisos thanks to the Finance Act 2021. You can use a ULIP Calculator to estimate future returns and the value of a ULIP investment.
High-premium ULIPs are not excluded from paying taxes.
According to these conditions, if for the entire tenor, the amount of premium paid for the ULIP exceeds 2.5 lakhs in any year, there would be no tax exemption for the ULIP policy(s) purchased on or after 1st February 2021.
No tax exemption is permitted for ULIP plans issued on or after 01-02-2021 if the total amount of annual premium paid in any year during the tenor of the ULIP exceeds 2.5 lakhs, according to the fourth proviso. In particular, this proviso refers to a specific policy. You won't be qualified for the tax exemption under section 10(10D) if the premium for your single insurance exceeds 2.5 lakhs in any given year.
The exemption policy in the event of numerous policies is provided by the fifth proviso. If more than one ULIP is granted on or after 01-02-2021, the total amount of all premiums paid for all plans must not exceed 2.5 lakhs in order to qualify for the tax exemption under section 10(10D). Additionally, you can choose which of your four plans you want to receive tax exemption on if only two of them qualify for the exemption.
The total value assured at maturity will be added to your taxable income if the premium paid in any year of the tenor exceeds the limit of 2.5 lakhs.
No adjustments to the former ULIP premium
If you purchased a ULIP before January 2, 2021, you will be eligible for the tax exemption under Section 10(10D) regardless of the amount of the premium you paid. However, if you purchased a policy before January 1, 2021, and another after, you will not be able to take advantage of the tax exemption on the new insurance if the total of the premium payments for both plans exceeds Rs. 2.5 lakhs.
The lower net worth individuals and investors will now be eligible for all tax exemptions when investing in ULIPs, as well as at the time of maturity or passing away. The High Net Individual (HNI), however, will now have to deal with the increased tax burden.
ULIP is still one of the more appealing investment options despite the new regulations. First off, by paying your insurance premiums, it combines excellent returns on investment with extra security by covering you and your dependents. Second, it continues to permit a section 80C tax deduction of 1.5 lakh rupees, offering ULIP tax benefits. Thirdly, despite all the modifications, very few people have premiums that are higher than 2.5 lakhs per year. As a result, the middle class still has a viable investment option.
ULIPs provide both investing and life insurance benefits. They also ensure that your loved ones are safeguarded financially in the event of an unforeseen circumstance.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.