Investing money is to gain good returns and increase your wealth. This money helps you fulfill your goals and live a financially independent once you retire. There are different financial instruments in the market that you can use for investment. Among such devices is a ULIP policy.

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

Taxation of ULIP proceeds to create 'level-playing field' with mutual funds: I-T department - The Economic Times

What is a ULIP?

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

Life cover is provided to the policyholder’s family in the insurance part. If the policyholder passes away during the policy term, the insurer will compensate the family with a death benefit. They can use this money to manage necessary expenses without the risk of financial instability.

What changes have been introduced in ULIPs?

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

  1. If you own one policy, its premium would be eligible for tax deduction under Section 80C of the Income Tax Act if it does exceed the limit of Rs.2.5 Lakhs.
  2. If you own more than one policy, the combined premium of both policies should not exceed Rs.2.5 Lakhs to gain tax deduction under the same section.
  3. If the tax deduction has been claimed on different policies at different times, the premium should not exceed the limit of Rs.2.5 Lakhs.
  4. Suppose the premium limit does exceed Rs.2.5 Lakhs. In that case, 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 you gain if you surrender your policy or if it matures will get taxed if no tax deductions are applicable.
  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%, their returns would be taxed.
  8. Similarly, if the investment in equity funds is less than 65%, their returns would also be taxed.
  9. A long-term capital gain (LCTG) tax is applied to your investment returns.
  10. If there are returns during the one-year holding period, they would be taxed at 15%
  11. If there are returns after the one-year holding period, they would be taxed at 10%.
  12. While the 10% and 15% LTCG tax is for investment in equity funds, for non-equity investment, the tax rate is 20%.
  13. This is applied to 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 you can simultaneously have more than one similar policy; the premiums for the policy should not exceed the pre-determined limit to avoid tax on the returns.

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