Published On : Thu, Mar 25th, 2021

ULIP Taxation Rules As Per Budget 2021 Explained

For the longest time, Unit-Linked Insurance Plans (ULIPs) have been a popular investment instrument in India. ULIP investment is an attractive option because it offers life insurance coverage along with the opportunity to build wealth. The insurance provider deducts applicable charges from your premium, which are quite minsicule. As per your investment goals, they put the rest of the capital in different avenues, such as equity, debt, or a combination of funds.


Additionally, ULIPs offer many tax exemptions that make them more lucrative. However, Budget 2021 has proposed specific changes to the ULIP tax benefits. Read on to understand the new taxation rules better.


ULIP tax benefits before Budget 2021


ULIPs offer different exemptions. Section 80C of the Income Tax Act, 1961, makes the premium paid tax-deductible up to INR 1.5 lakhs yearly, as ULIP is essentially a life insurance policy. Other than that, Section 10 (10D) of the Income Tax Act, 1961 offers multiple other advantages, including a tax-free death benefit. Before the Budget 2021, the maturity benefit of ULIPs was also tax-exempt under Section 10 (10D) if the annual premium remained under 10% of the policy’s sum assured. This made ULIPs more promising investment instruments over other products like equity mutual funds.


When ULIP’s returns were entirely tax-free, you had to pay a 10% long-term capital gains tax on any income over INR 1 lakh earned through equity mutual funds. This is why high-income individuals preferred ULIPs over mutual funds for their long-term investments. However, there are some changes in ULIPs under the new tax regime.


ULIP tax benefits after Budget 2021


While Budget 2021 has not proposed any changes to the ULIP tax benefits under Section 80C, the new rule is bringing amendments to Section 10 (10D). According to the proposal, the maturity benefit from ULIPs will now be considered as long-term capital gains and will be taxed accordingly. However, it does have certain conditions. The new taxation rule will only affect ULIPs bought on or after February 1, 2021, and if their yearly premium is more than INR 2.5 lakh. This regime will bridge the gap between ULIPs and mutual funds in terms of taxable income.


If your ULIP was initiated before February 1, 2021, you would still be eligible to receive tax-free maturity payouts even if your annual premium is over INR 2.5 lakh. If your yearly premium is less than INR 2.5 lakh, you can enjoy a tax-exempt maturity benefit from the newly bought ULIPs, too. Additionally, the new taxation rules do not affect the death benefit. So, it remains tax-free.


Budget 2021 also proposed a Securities Transaction Tax (STT) on the income generated from ULIPs by redeeming or surrendering the policies bought after or on February 1, 2021. The tax will also apply to the returns from ULIPs when you make a partial withdrawal from the fund or when the policy matures.


Why you should invest in ULIPs


If you are wondering why you should invest in ULIP now with the new taxation rules, the answer is its dual benefit. ULIPs score over other investment avenues by providing a life insurance cover. It ensures that the policyholder’s dependents remain financially secure in his or her absence. Additionally, ULIPs remain the best tax-saving equity-oriented investment avenue for people who do not want to invest more than INR 2.5 lakh per year.


Now that you understand how Budget 2021 will affect the ULIP returns, you can do your financial planning accordingly. Before buying a new ULIP, take some time to compare different policies online to find their past performances. This way, you can choose a plan that offers a higher possibility of good earnings over an extended period.