New Rules of ULIP Taxation

Posted in Investment By Prabhat Singh - Mar 26,2022
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The investment option that has been more popular than other instruments in the recent past are ULIPs or Unit Linked Insurance Plans. The reason for this popularity is simple -it combines the advantages of insurance and investment. It also offers significant tax exemption under section 10(10D) and tax deduction under section 80C. However, these benefits have been altered under the Finance Act, 2021. But despite that, ULIPs (Unit Linked Insurance Plans) still have the potential to be a viable investment choice.

What is a ULIP?

A Unit Linked Insurance Plan or ULIP is a hybrid investment option that combines the benefits of insurance and investment for the customers. The premium you pay goes into two different avenues. While one part has you investing in wealth creation, the other is used to insure you.

When you invest in ULIP, you must remember that the premium of only 10% of the actual capital sum assured is eligible for tax deduction under section 80C.

The New Rules of ULIP

To make ULIP a level playing field, the Ministry of Finance, in the 2021-22 union budget, stated clearly that the tax regime for high premium ULIPs and low premium ULIPs had to be different. The Finance Act 2021 has inserted the fourth and fifth proviso in section 10(10D). As per this act-

  • No tax exemptions for high premium ULIPs 

    As per these provisos, there won’t be any tax exemption for the ULIPs policy(s) bought on or after 1st February 2021 if during the whole tenor the amount of premium paid for the ULIP exceeds ₹ 2.5 lakhs in any year.

The fourth proviso states that no tax exemption is allowed for the ULIP policies issued on or after 01-02-2021 if the total amount of annual premium paid in any year during the tenor of ULIP exceeds ₹2.5 lakhs. This proviso especially talks about a single policy. So, if the premium paid for your single policy exceeds ₹2.5 lakhs in any year, then you won’t be eligible for the tax exemption under section 10(10D).

The fifth proviso supplies the exemption rule in case of multiple policies. If multiple ULIPs are issued on or after 01-02-2021, then to get the tax exemption under section 10(10D), the aggregate amount of all the premium paid of all the policies must not exceed the threshold of ₹ 2.5 lakhs. Also, if you have four policies, out of which only two are eligible to get tax exemption, in that case, you can choose which ones you’d like to get tax exemption on.

If the premium paid exceeds the limit of ₹ 2.5 lakhs in any year of the tenor, then the total sum assured at the time of maturity will be added to your taxable income.

  • No changes for old ULIP premium 

    If you bought ULIP before 01-02-2021, then irrespective of the amount of the premium you paid, you will get the tax exemption under sec 10(10D). However, if you bought one policy before 01-02-2021 and one after, then, in that case, you cannot enjoy the tax exemption on the new policy if the aggregate of the amount of the premium paid for both policies exceeds the threshold of ₹ 2.5 lakhs.

After the new ULIP Taxation norms, the lower new worth individuals/investors will get all the tax exemptions while investing in a ULIP, or at the time of maturity or death. But the High Net Individual (HNI) will now have to face the new tax burden.

Despite the new rules, ULIP is still one of the attractive investment options. Firstly, it combines high returns on investment with additional security by insuring you & your dependents by paying you insurance premiums. Secondly, it still allows a tax deduction of ₹1.5 lakhs under section 80C. Thirdly amid all the changes, there are only a few who have their premium exceeding ₹ 2.5 lakhs per annum. Hence, the middle class still have a feasible investment choice to invest in.

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