New ULIP Tax Rules- Read Before You Invest!

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ULIP insurance is one of the most popular choices for investors since they are tax-efficient and come with the dual advantages of insurance and investments. The insurer invests the premium (after applicable deductions) in market-linked instruments and funds for earning returns. Simultaneously, the policyholder also gets life coverage throughout the entire tenure of the policy. Long-term ULIP investments may benefit those looking to build a corpus to meet future goals. 

You can use online ULIP calculators to work out the approximate returns, premiums, and other aspects before investing. However, taxation rules for ULIPs deserve attention above everything else. These have an impact on your policy, and you should understand them carefully as a result. In addition, some new tax rules have also been introduced in recent times. This article takes you deeper into uncovering the same. 

New tax regulations for ULIPs

The Finance Act of 2021 unveiled a new amendment for Section 10 (10D). It has come into force from 1st February 2021. Here are the key points worth noting in this regard: 

  • ULIP insurance plans issued on or after 1st February 2021 will not have any exemptions if you have paid Rs.2.5 lakhs or higher as your premium for any financial year. The amount you get at maturity, including bonuses, will be taxable as long-term capital gains in this case.  
  • If you have multiple ULIPs and pay an aggregate premium that exceeds Rs.2.5 lakh, then the maturity proceeds will be similarly taxable. 
  • LTCG (long-term capital gains) tax will apply for ULIPs like equity-based investments. Taxes are payable at 10% if the gains exceed Rs.1 lakh in a holding period exceeding 12 months.  
  • However, payouts resulting from the death of a policyholder will not be taxable. 

The Government has also introduced a new provision in the 2023 Union Budget. While the death-based payouts continue to be tax-exempted, payouts of maturity proceeds for all life insurance policies with annual aggregate premiums exceeding Rs.5 lakhs per year will also be taxed. Hence, this applies to all classes and categories of life insurance policies, except ULIPs and term insurance (which does not offer any maturity proceeds). 

Suppose you buy a ULIP valued at Rs.30 lakhs with a ten-year maturity period. In this case, your annual premium can be Rs.2.6 lakhs. Also, suppose you get Rs.48 lakhs as your maturity payout after this duration of ten years. Your annual premium is more than Rs.2.5 lakhs, and in this case, you will pay taxes on Rs.18 lakhs, namely the difference between the maturity amount and the value (Rs.48 lakhs – Rs.30 lakhs). Conversely, suppose you invested Rs.1.5 lakhs per year for ten years for a ULIP valued at Rs.20 lakhs and received Rs.35 lakhs at maturity. Since your annual premium did not exceed Rs.2.5 lakhs, your maturity proceeds will be tax-exempted under Section 10 (10D). 

Now consider a scenario where you invested in multiple ULIPs. Suppose the first one is issued on 1st April 2020 and has a premium of Rs.2.6 lakhs. Suppose the second one is issued on 1st April 2021 and has a premium of Rs.3 lakhs. In this case, the maturity proceeds from the first policy will be tax-exempted since it was issued before 1st February 2021. However, the maturity proceeds of the second policy will be taxable since it was issued on 1st April 2021, and the premium amount exceeds Rs.2.5 lakhs. Renewal premiums before 1st February 2021 will also be tax-exempted. 

Keep these new tax rules for ULIPs in mind before investing. Make sure you are comfortable paying taxes on the maturity proceeds or sticking to an aggregate annual premium lower than the specified taxability limit. Consult a financial advisor before structuring your ULIP investments, keeping an eye on your tax benefits

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