What Is ULIP?
A unit-linked insurance plan, or ULIP, is a special plan that offers you both an investing component and an insurance policy. Your premium payment is split between purchasing a life insurance policy and investing the remaining money of your choice. Various insurance firms offer several fund options.
Exempt- Exempt- Exempt Tax Category
Tax-Saving Tools Fall Into Three Groups:
- EEE (Exempt- Exempt- Exempt) (Exempt- Exempt- Exempt)
- EET (Exempt- Exempt- Taxable) (Exempt- Exempt- Taxable)
- ETE (Exempt- Taxable- Exempt) (Exempt- Taxable- Exempt)
ULIPs fall under the EEE category, which often applies to long-term investments such as Employee Provident Funds (EPF), Public Provident Funds (PPF), National Pension Schemes (NPS), etc.
- The initial exception pertains to investments made in ULIPs. Your annual investment in these instruments can be written off as a tax deduction.
- Interest from investments is subject to the second exemption.
- The third exemption is based on the investment’s income or maturity amount when it is withdrawn.
- Deductions under Section 80C of the Income Tax Act are the most significant ULIP tax benefits you may take advantage of each year.
The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Revised ULIP Taxes Rules After The Budget For 2021
One of the most tax-efficient investment options in the nation has historically been ULIP plans. This was an amazing market investment choice when considering the investment alternatives offered under a ULIP. Tax advantages on invested funds and plan withdrawals allowed you to be practically tax-free and accumulate wealth. Yet, due to the recent tax changes, even ULIPs are now subject to taxation.
Here are the updated ULIP taxes regulations that became effective in February 2021:
- Returns From ULIPs May Be Taxable
Previously, ULIP returns were not subject to taxation if your annual investment did not exceed 10% of the plan’s life insurance coverage. The returns you receive will be taxed if the premium you pay for ULIPS exceeds Rs 2.5 lakh. The makeup of your ULIPs will affect the tax rate.
- Limitations On Fund Switches
Fund switches are a feature that is present in the majority of ULIP plans. This allows you to change funds if you think you can get higher returns. The majority of these “switches” were free. Now, though, this might no longer be the case. This is a result of ULIP now becoming taxable.
You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
The tax will be calculated based on how long you have owned ULIPs:
- Less than three years: subject to the tax slab rate
- More than three years: subject to a 20% charge
Tax will be determined on the type of funds held at the time of maturity under both section 112 and Section 112A.
- Tax Regulations For Death Benefits
Regarding the death benefit that will be paid to your nominee after your passing, the tax regulations remain unchanged. According to Section 10(10)D of the Income Tax Act, the death benefit is still tax-exempt.
How Do ULIP Taxes Operate Currently?
- Taxes Based On Your Funds
The funds you choose and the quantity you choose will determine the taxes you will pay on your ULIP returns.
- Your funds will be taxed as equity mutual funds if the equity portion exceeds 65%.
- For indirect equity investments, such as those made through ETFs, the equity must be at least 90% to be taxed as an equity mutual fund.
- Investments in equity funds are exempt from long-term capital gains (LTCG) up to Rs 1 lakh. Taxes will be charged on any sum more than that.
- Section 80C Tax Exemption
The deductions under Section 80C have not been altered by the recent tax changes. According to the guidelines under section 80C of the Income Tax Act, you may still be able to deduct up to Rs 1.5 lakhs from the premium you have already paid. Nonetheless, the following issues need to be addressed: Section 80C allows deductions from the entire value of your investments.
- 3. Section 80C And Other ULIP Tax Advantages
Your returns will be tax-free under Section 10(10)D if you pay a premium of less than Rs 2.5 lakh in a calendar year. However, taxes will be due if the premium is more than Rs 2.5 lakh per year. In addition to offering you a life insurance policy and investing opportunities, ULIPs also give you ULIP tax benefits. Nonetheless, there have been some adjustments in taxation since the most recent changes.
Currently, there are 2 tax regimes in India – new and old. To get the tax benefit you desire, choose the correct one after consulting an expert. You can opt for a regime change during the next financial year.