ULIP Taxation Impact of Budget 2021-22

In recent years, ULIPs or United Linked Insurance Plans have become a popular investment choice. This is because ULIPs combine the advantages of both investment and insurance while offering significant tax advantages. However, the recent amendments under Budget 2021-22 have altered the tax benefits of ULIP plans in a certain capacity. But even after the proposed changes, ULIPs still possess advantages that firmly establish their position as a great investment option.

Here is everything about ULIP investment, their tax benefits and the ULIP taxation impact of Budget 2021-22:

What is ULIP?

The best ULIPs are an ideal combination of insurance and investment. When you buy a ULIP, the insurance company uses a part of the premiums you pay to create a safety life cover for you. The remaining portion of the premiums is used to invest in the market funds such as equity, debt or balanced funds. The investment is made as per your risk appetite and financial objectives. The insurer levies minimal ULIP plan charges for all services.

What are the most important tax features of ULIPs?

• Tax-exempt premiums: The premiums you pay towards a whole life ULIP plan are exempt from taxes up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961. However, for this provision, the sum of your annual premium should not be more than 10% of the policy sum assured. 
• Tax-exempted death and maturity benefit: As per Section 10(10D), the maturity value of the ULIP plan is exempt from tax. The death benefit received by the nominee, in case of your unfortunate demise during the ULIP tenure, is also tax-free. This benefit makes the bonuses and ULIP returns tax-free. But this exemption is available only for ULIP plans with policy premiums less than 10% of the sum assured. That said, the ULIP tax advantages on maturity and gains have been revised in Budget 2021-22.
• Tax- exempted withdrawals: Depending upon your premium paying term and policy term, after the expiry of the five-year lock-in period, ULIPs can allow you to make tax-free withdrawals.  Talk about SWP here.

What are the ULIP taxation changes made in Budget 2021-22?

To level the ground of ULIPs and other equity-linked market instruments, Budget 2021-22 proposed several changes in the ULIP taxation. As per the new tax norms, the new ULIP plans, issued on or after February 2021, will be liable to pay taxes on the maturity amount. This provision is applicable only if the annual premiums of a ULIP policy exceed ₹2.5 lakhs.

Besides paying taxes on maturity, ULIP policies with annual premiums of more than ₹2.5 lakhs will also be liable to capital gain tax as per Section 112A. So, new ULIP policies will attract a long-term capital gain tax of 10% in such case, provided the ULIP gains exceed ₹1 lakh. However, for existing ULIP policies and new ULIP policies (below ₹2.5 lakh premium threshold), there is no tax on capital gains or the maturity amount.

How do the new ULIP taxation rules impact investors?

As per the new ULIP taxation norms, the tax burden has primarily changed for high-net-worth investors with yearly premiums of over ₹2.5 lakhs. Low-net worth investors with annual premiums less than ₹2.5 lakhs still enjoy the same tax advantages as before Budget 2021-22 amendments. This implies that their premiums, maturity and death benefits, withdrawals as well as capital gains are exempt from taxes. Even high-net-worth investors can enjoy the same benefits if they limit their annual premiums to not more than ₹2.5 lakhs.

Are ULIPs still an attractive investment avenue?

Despite the new tax provisions, ULIPs remain an attractive investment option. Firstly, ULIPs combine the security of insurance and higher returns of investment. This helps you secure your family while also garnering optimal returns in the long-run.

Secondly, ULIPs continue to enjoy tax exemption on premiums up to ₹1.5 lakhs. Besides, the death benefit is still exempt from taxes under Section 10(10D). On the other hand, even the maturity benefit is taxable only when the annual premiums exceed ₹2.5 lakhs, which is a narrow possibility. In terms of capital gains, the taxes accrue only when premiums are over ₹2.5 lakh, and the corresponding gains are above ₹1 lakh, the possibility of both is not very high.

Thirdly, good ULIP plans are easy to understand, unlike the complicated equity-linked market investment options. As an investor, you also get a smooth and hassle-free experience to match your fund allocation as per your risk preference and financial goal.

ULIP plans by Edelweiss Tokio Life Insurance

Edelweiss Tokio Life Insurance understands your insurance and investment needs and offers you a comprehensive and affordable ULIP plan – Wealth Secure+.

• The plan grows with you and gives you a life cover till you are 100 years old. You can also include your children and spouse in this same plan.
• You can start investing in the plan with only ₹1,000.
• The plan allows you to add surplus as top-up premiums anytime during the policy tenure. There is no limit on how many times you can do this.
• To reward you for your loyalty, the plan grants loyalty additions annually from the end of the sixth policy year. The plan adds wealth boosters every fifth year at the end of the tenth policy year. Above all, at the end of the policy, the plan grants maturity additions.
• You have the flexibility to choose your payout mode. You can opt for a regular income source during retirement. Or, take the systematic withdrawal option to get a specific percentage of the maturity amount over a defined period. The frequency of payout can be monthly, quarterly, half-yearly or yearly.
• The plan comes with a policy lock-in period of only five years. You can take partial or systematic withdrawals during this time.
• You can allocate your money in seven diverse funds that will help boost your returns. You also have the freedom to choose if you want to manage your fund allocation yourself or you want experts at Edelweiss to do in on your behalf.
• All tax benefits on premiums paid, maturity proceeds, capital gains, death benefits and withdrawals are available in the Wealth Secure+ plan.

The competitive features, affordable costs and attractive returns make the Edelweiss Tokio ULIP Plans an ideal investment for your financial security.

 

Yashwant Naik - Lifestyle and BFSI Writer

Yashwant is a freelance content writer, interested in a wide range of spheres from yoga and personal finance to cooking. He is also an aspiring yoga enthusiast who is trying to find some balance and harmony in life through a healthy lifestyle.