All About Tax Benefits of a ULIP

By Team Newsable | First Published Sep 12, 2022, 3:23 PM IST

A ULIP plan is an insurance policy with investment benefits and stands for Unit-Linked Insurance Plan. You receive a life cover from the insurance company using the premiums you pay toward the plan.

ULIPs have slowly gained recognition in India over the last few years. The Finance Ministry has decided to change the tax regulations governing ULIPs since a rising number of Indian investors are choosing to invest in the investment option due to its wealth of benefits.

To bring ULIP plans in line with other investment options, the amended tax laws surrounding ULIPs aim to change how they are regarded. In this article, let's look at the recent modifications to the taxation regulations for ULIPs.

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Are ULIPs Right For You?

A ULIP plan is an insurance policy with investment benefits and stands for Unit-Linked Insurance Plan. You receive a life cover from the insurance company using the premiums you pay toward the plan. In addition, the insurer invests the premiums in your preferred market-linked financial instruments after deducting all applicable charges. ULIPs have a unique nature of providing dual benefits, and people looking for long-term investments, say for the next 15-20 years, should choose ULIPs. The returns for these investments can be calculated using a free online ULIP calculator.

The Tax Benefits of ULIPs

A typical unit-linked insurance plan offers the policyholder several benefits, including tax advantages and the advantages of life insurance and investment. Here is a brief overview of the numerous tax breaks and advantages that a ULIP plan provides under applicable sections of the Income Tax Act of 1961.

1. Under Section 80C

Subject to the particulars outlined in Section 80C of the Income Tax Act of 1961, you are permitted to deduct the premium you pay for a Unit-Linked Insurance Plan as a deduction from your total taxable income. The maximum deduction you can avail of per financial year is ₹1.5 lacs under this provision.

However, to qualify for this deduction, the annual ULIP premium you pay cannot be greater than 10% of the death benefit assured by the plan. Note that only ULIPs purchased on or after April 1, 2012, are subject to this requirement.

The total yearly ULIP premium for policies bought before April 1, 2012, should not be more than 20% of the death benefit assured by the policy.

2. Under Section 80D

You can deduct the premiums paid toward a health or medical insurance plan under section 80D of the Income Tax Act of 1961. You can still claim deductions under this provision even though a ULIP is just a life insurance product with investing benefits through selecting a ULIP critical illness rider.

You may deduct up to ₹ 25,000 of the premium you pay toward the critical illness rider under section 80D. In addition, you may claim up to ₹ 50,000 if you are older than 60.

In addition to the deductions mentioned above, you are eligible to claim an additional ₹ 25,000 if you are paying ULIP rider premiums for your parents, who are not senior citizens. Additionally, the additional deduction you may claim increases to Rs. 50,000 if your parents are elderly (over 60).

Therefore, the total deduction you can claim under this section would be ₹ 75,000 if you were paying rider premiums for both yourself (if you were under 60 years old) and your parents (if you were over 60 years old). However, if you and your parents are over 60 and you pay rider premiums for both of you, the amount of deduction you can make increases to ₹1 lac.

3. Under Section 10D

According to section 10(10D) of the Income Tax Act of 1961, the death benefit under a unit-linked insurance plan is free of taxation for your nominees.

Not only that. Even the maturity benefits you receive from a ULIP are tax-free if you fulfil the requirements outlined in the Income Tax Act, 1961. The total yearly premium for a ULIP purchased on or after April 1, 2012, should not exceed 10% of the total amount assured under the plan. Additionally, if you bought your ULIP before April 1, 2012, the total yearly premium shouldn't be higher than 20% of the total amount assured by the policy.

New Regime for the Taxation of ULIP

All Unit-Linked Insurance Plans purchased after February 1, 2021, will have their maturity benefits taxed at the time of payment under the heading 'Capital Gains.' However, the capital gains tax would only be applied to ULIPs bought after February 1, 2021, if their total annual premium exceeds ₹2.5 lacs in any given year.

If you buy several ULIPs on or after February 1, 2021, not only must each plan's annual premium be less than ₹2.5 lacs, but the combined annual premium of all the plans must not be more than ₹2.5 lacs. However, if it goes over that amount, the maturity benefits of the plan that contribute to the excess would be subject to capital gains tax.

According to the Income Tax Act of 1961, capital gains should be divided into long-term and short-term categories, and the applicable tax rate should be computed accordingly.

Conclusion

ULIP plans are now subject to capital gain taxation due to the implementation of a new tax regime. This implementation aims to prevent people from solely using ULIPs to lower their tax obligations. Therefore, utilize a ULIP calculator to assist you in calculating the returns you can expect from the plan if you're going to buy a Unit-Linked Insurance Plan soon. This will make it convenient for you to determine your tax liability as per the new regime.

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