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How ULIP taxation has brought in a level playing field with other investments? | Bajaj Allianz Life

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How ULIP taxation has brought in a level playing field with other investments?


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Aug 11, 2022

By : Bajaj Allianz Life

Over the years, ULIPs have been steadily gaining popularity in India. With an increasing number of Indian investors opting to invest in the investment option due to the plethora of benefits that it offers, the Finance Ministry has chosen to update the taxation rules surrounding ULIPs.

The revised taxation rules surrounding ULIPs have imposed certain restrictions with regard to how they’re treated in a bid to bring them on par with other investment options. In this article, let’s take a look at the changes in the ULIP taxation rules that were introduced recently.

 

What is an Unit Linked Insurance Plan (ULIP)?

 

However, before we get into the tax benefits offered by a ULIP and the various changes to the taxation rules governing the investment option, let’s take a quick look at the concept of ULIP.

Also known as a Unit-Linked Insurance Plan, a ULIP is an insurance product that also offers investment benefits. The insurance provider uses the premiums that you pay towards the plan to provide you with a life cover. In addition to that, the insurer also invests the premiums in market-linked instruments of your choice. This dual-benefit nature is simply one of the many features of a ULIP.

 

ULIP Tax Benefits and Deductions

 

In addition to providing the policyholder with the benefits of both insurance and investment, a typical Unit-Linked Insurance Plan also offers a few other advantages; tax benefits being one of them. Here’s a quick look at the various tax deductions and benefits that the investment option offers.

1. Under section 80C

Section 80C of the Income Tax Act, 1961 allows you to deduct the premium that you pay towards a Unit-Linked Insurance Plan as deductions from your total taxable income, subject to conditions stated therein. Under this section, the maximum amount of deduction that you can claim each financial year is capped at Rs. 1.5 lakhs.

However, to claim this deduction, the ULIP premium that you pay in a year should not exceed 10% of the death sum assured under the plan. This condition applies only to ULIPs purchased on or after April 01, 2012.

For ULIPs purchased before April 01, 2012, the total annual ULIP premium shouldn’t exceed 20% of the death sum assured under the plan.

2. Under section 80D

Section 80D of the Income Tax Act, 1961 allows you to deduct the premiums that you pay towards a health or medical insurance plan. Although a ULIP is essentially just a life insurance product with investment benefits, you can still claim deductions under this section. How, you ask? By opting for a ULIP rider such as the critical illness rider.

The premium that you pay towards the critical illness rider can be claimed as deduction under section 80D to the tune of Rs. 25,000. If you’re above 60 years of age, you can claim up to Rs. 50,000.

If you’re also paying ULIP rider premiums for your parents who are not senior citizens, you can claim an additional Rs. 25,000, over and above the deductions mentioned above. And if your parents are senior citizens, then the additional deduction that you can claim rises up to Rs. 50,000.

So, for instance, if you’re paying rider premiums for both yourself (below 60 years of age) and for your parents (above 60 years of age), the total deduction that you can claim under this section would be Rs. 75,000. On the other hand, if both you and your parents are above 60 years of age, and you pay rider premiums for yourself and your parents, the maximum deduction that you can claim goes up to Rs. 1 lakh.

3. Under section 10(10D)

The taxation benefits and features of a ULIP don’t just end there though. The death benefit under a Unit-Linked Insurance Plan is completely free from taxation in the hands of your nominees as per section 10(10D) of the Income Tax Act, 1961.

That’s not all. Even the maturity proceeds that you receive from a ULIP is tax-free subject to the provisions stated in the said act. However, there’s a condition that you would have to satisfy to enjoy this tax exemption. If your ULIP was purchased on or after April 01, 2012, the total annual premium shouldn’t exceed 10% of the total sum assured under the plan.

And if your ULIP was purchased before April 01, 2012, the total annual premium shouldn’t exceed 20% of the total sum assured under the plan.

 

New ULIP taxation rules

 

The Union Budget that was presented on February 01, 2021 brought with it a major change to how ULIPs were taxed.

The maturity proceeds of all Unit-Linked Insurance Plans purchased from February 01, 2021 will be taxed under the head ‘Capital Gains’ at the time of payment. However, the capital gains tax would be levied only if the total annual premium of ULIPs purchased from 1 February 2021 exceeds Rs. 2.5 lakhs in any year during its tenure.

If you purchase multiple ULIPs on or after February 01, 2021, not only should each plan’s annual premium be lower than Rs. 2.5 lakhs, but the aggregate annual premium of all the plans shouldn’t also exceed Rs. 2.5 lakhs. If it does, however, exceed the threshold of Rs. 2.5 lakhs, the maturity proceeds of the plan that contributes to such excess would come under the purview of capital gains tax.

In case of high-value ULIP, the tax treatment will be governed basis whether such policy qualifies to be unit of an ‘equity-oriented fund’. If the fund invests minimum 65% of the total proceeds in equity shares of listed domestic company or 90% of total proceeds in units of another listed fund, which in-turn invest 90% of proceeds in equity shares of listed domestic company, in such a case it shall be treated as equity-oriented fund. Such investment thresholds are required to be satisfied throughout the term of such insurance policy.

Thus, if the above investment thresholds are satisfied, the high-value ULIP shall be treated as unit of equity-oriented fund. Else, ULIP shall be treated as unit of debt-oriented fund. The classification of capital gains between long-term and short-term and the applicable tax rate shall be determined as follows as per the Income Tax Act, 1961.

Particulars

Equity oriented ULIP

Debt oriented ULIP

LTCG

10% (without indexation) u/s. 112A

20% (without indexation) u/s. 112

STCG

15% u/s. 111A

Slab rates

Holding period

1 year

3 years

 

Conclusion

 

The introduction of this new taxation rule has brought ULIPs within the purview of capital gain taxation. The view behind the enactment of this new rule is to ensure that individuals don’t treat ULIPs as a way to reduce tax alone.

So, if you’re planning to purchase a Unit-Linked Insurance Plan in the near future, make sure to use a ULIP calculator to help you determine the returns that you can expect from the plan. This will allow you to calculate your tax liability in a much better manner.

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~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

**Past performance is not indicative of future performance.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.

In this policy, the investment risk in investment portfolio is borne by the policyholder. Investment in ULIPs is subject to risks associated with the capital markets. The policy holder is solely responsible for his/her decisions while investing in ULIPs. The views stated in this article is not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale.