ULIP Tax Rules are changed in Budget 2021. Capital gain tax is applicable on the gain from ULIP policy provided yearly premium is exceeding 2.5 Lakh. The new rule is introduced to bring equality between mutual funds and ULIPs. Let’s demystify ULIP Tax Rules 2021.
ULIP is a unit-linked insurance policy. ULIP provides life coverage as well as wealth generation to the purchaser. In ULIP part of the premium goes for the life insurance coverage and the remaining is invested in the market in the combination of equity and debt. The return of the money invested varies based on the investment done by the ULIP fund.
ULIP Tax Benefits
#1 ULIP tax benefits on premium
The premium paid for the ULIP plan allows you to claim tax deduction under section 80C and 10D. You can claim up to 1.5 Lakh. You need to make sure that you continue the ULIP policy for 5 years to get the tax exemption benefits. In case you stop contributing to the ULIP plan before lock-in period of 5 years the entire amount claimed in the earlier years shall be considered as income in the termination year and tax is charged as per the applicable tax slab.
#2 ULIP tax benefits on maturity
ULIP is a market link product. However, the maturity amount on ULIP was tax-free, provided the premium amount is less than 10% of the sum assured. Now the rule of tax-free maturity is tweaked. As per the new rule if the premium paid for the policy is exceeding 2.5 Lakh per annum you need to pay capital gain tax on the maturity amount.
#3 ULIP withdrawal tax rule
Withdrawal from the ULIP fund is allowed after 5 years of lock-in period. If you make a withdrawal of money from the ULIP plan, you need not to pay any taxes on the withdrawal amount provided the withdrawal amount is not exceeding 20% of fund value. In case of the death of the policyholder, the entire amount received from the fund which includes sum assured and return generated is tax-free.
New ULIP Tax Rules 2021
The tax rule applicable to ULIP is now modified. As per new tax rules, the maturity amount from the ULIP is no longer tax-free in case the yearly premium amount is more than 2.5 Lakh. The investors need to pay capital gain tax on the maturity amount as per section 112A. The new rule is applicable for the ULIP policy purchased after 1st February 2021. This means if you have already purchased a ULIP policy where the yearly premium amount is more than 2.5 Lakh you need not worry.
Let’s understand this by example –
Old ULIP Policy Holder
ULIP Policy purchased – Before Feb 2021
Premium Amount – Monthly premium more than Rs.20833 (Yearly premium above 2.5 Lakh) or less than Rs.20833.
Premium paid on the policy – Less than 10% of the sum assured
Lock in period – 5 years (Policy in force since 5 years)
Under above case policy holder will enjoy benefits of section 80C up to 1.5 Lakh as well as tax free maturity amount. No rule change for old ULIP policy holder.
New ULIP Policy Holder
Case 1
ULIP Policy purchased – After Feb 2021
Premium Amount – Yearly premium of the policy less than 2.5 Lakh
Premium paid on the policy – Less than 10% of the sum assured
Lock in period – 5 years (Policy in force since 5 years)
Under this case the policy holder still enjoys the tax free return on the maturity of the policy. All income tax related benefits will remain same.
Case 2
ULIP Policy purchased – After Feb 2021
Premium Amount – Yearly premium of the policy more than 2.5 Lakh
Premium paid on the policy – Less than 10% of the sum assured
Lock in period – 5 years (Policy in force since 5 years)
Under case 2 income or return on maturity shall be treated as long term capital gain and charged as per section 112A. The capital gain in excess of 1 Lakh shall be taxable @ 10% without indexation.
Should you still invest in ULIP?
After understanding the new tax rules applicable you must be thinking is it advisable to invest in ULIP or not. Here are few pointers in this direction.
- The 80C deduction up to 1.5 Lakh for the ULIP premium paid is still available to the investors.
- If the yearly premium amount is less than 2.5 Lakh you will still enjoy the tax-free return from the ULIP.
- ULIP is now treated at par with equity-oriented funds as per section 112A.
- You can enjoy the flexibility of switching between various funds.
- ULIP comes with lock-in period of 5 years.
- You can enjoy the benefits of insurance as well as wealth generation by investing in ULIP.
ULIP is claimed to be a good investment option however, you need to be extremely careful before investing in ULIP. The returns generated by most of the ULIP is very low. ULIP is not liquid as it comes with lock in period.
As per me, you should go for a combination of term insurance plans and Mutual funds instead of investing your money in ULIP.
