There are different financial instruments in the market that you can use for investment. The purpose of investing money is to gain good returns and increase your wealth in the process. This money helps you in fulfilling your goals and live a financially independent life once you retire. Among such instruments is a ULIP policy.

While ULIPs have been gaining popularity among first-time and seasoned investors, there have been a slew of tax-related changes being introduced in them. If you are looking to invest in ULIPs and are wondering what these changes are and how they impact you; read on to get a better understanding about them.

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What is a ULIP?

A ULIP is a type of life insurance policy that provides you with dual benefits of investment and insurance in the same policy. In the investment part, you get to invest in equity funds, debt funds or balanced funds. While equity and debt funds have different risk factors and offer different returns, balanced funds are a mixture of both of these funds.

In the insurance part, life cover is provided to the family of the policyholder. If the policyholder passes away during the term of the policy, the insurer will compensate the family with a death benefit. This money can be used by them to manage vital expenses without the risk of financial instability.

What changes have been introduced in ULIPs?

The Government of India in its Union Budget for the financial year 2021-2022, introduced changes in regard to how tax plays a role in ULIPs. Listed below are the new tax charges of ULIP introduced in the budget:

  1. If you happen to own one policy, its premium would be eligible for tax deduction under Section 80C of the Income Tax Act, if it does cross the limit of Rs.2.5 Lakhs.
  2. If you happen to own more than one policy, the premium of both the policies combined should not exceed Rs.2.5 Lakhs in order to gain tax deduction on it under the same section.
  3. If the tax deduction has been claimed on different policies at different points of time, the premium should not exceed the limit of Rs.2.5 Lakhs.
  4. If the premium limit does exceed beyond Rs.2.5 Lakhs, the maturity benefits you receive from your new policy will not be eligible for tax deductions under Section 10(10D) of the Income Tax Act.
  5. The returns that you gain if you surrender your policy or if it matures would get taxed if there no tax deductions applicable on them.
  6. The taxable gain is calculated by calculating the difference between the amount you would gain, and the premiums paid till the point of surrender or maturity.
  7. If you have invested in equity funds and this investment exceeds 65%, the returns on them would be taxed.
  8. Similarly, if the investment in equity funds is less 65%, the returns on them would also be taxed.
  9. A long-term capital gain (LCTG) tax is applied on the returns of your investment.
  10. If there are returns during the 1 year holding period, they would be taxed at 15%
  11. If there are returns after the 1 year holding period, they would be taxed at 10%.
  12. While the 10% and 15% LTCG tax is for investment on equity funds, for non-equity investment, the tax rate is 20%.
  13. This is applied on the returns you gain during the holding period of 3 years.
  14. If there are returns after the holding period, the tax applied would be as per the slab rate.

What benefits do these new rules have for you?

The increase in the premium limit means that you can hold more than 1 policy at the same time. However, the premiums for the policy should not exceed the pre-determined limit in order to avoid tax on the returns as well.

This was all the information related to the new taxation rules for ULIPs. If you are planning on investing in them, be sure to use the ULIP plan calculator on any insurer’s website to see what kind of plan would be more suitable for you.