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Understanding Tax Exemptions in ULIP (Old and New)

ULIPs are now one of the leading instruments in India. But what are the ULIP tax exemptions under the new rules? Find out here.

  • 6,126 Views | Updated on: Mar 20, 2024

ULIPs are a very popular type of investment. In a ULIP plan, the policyholder pays a certain amount, called a premium, from which a portion is assigned to various fund possibilities, and the advantages of the investment are realised. When purchasing ULIP, an individual does not need to acquire a separate life insurance policy because it is incorporated into the plan

With many individuals flocking to this financial investing instrument, ULIP has carved out a niche in the investment market thanks to its dependability, extensive benefits, and capacity to generate considerable financial rewards. ULIP tax exemption is also one of the reasons they’ve become so well-known. However, certain modifications in structure for the ULIP tax exemption may create confusion among potential and present investors..

This article will take you through all the previous and new ULIP income tax exemptions to help you understand this tool better.

All About Old and New Unit Linked Insurance Plan (ULIP) Plan Tax Exemption

Old Unit Linked Insurance Plan (ULIP) Plan Tax Exemption

On January 19, 2022, the Central Board of Direct Taxes (CBDT) released a statement outlining the mechanism for determining whether ULIPs are tax-exempt. If the yearly premium for ULIPs topped ₹2.5 lakh, the ULIP tax-exempt status would be removed, according to Budget 2021. Nevertheless, there were many questions about how the framework would operate, particularly in the situation of multiple ULIPs, which include both types purchased before and after the budget plans.

The Central Board of Direct Taxes (CBDT) stated on January 19, 2022, the process for evaluating whether ULIPs are tax-exempt. According to the current CBDT announcement, the total premium of both new and old ULIPs would be evaluated for ULIP tax exemption. If the total surpasses ₹2.5 lakh, the exemption will not apply to new ULIPs with premiums over ₹2.5 lakh.

The return or income on the maturity of ULIPs with annual premiums above ₹2.5 lakh shall be assessed as capital appreciation and levied accordingly under section 112A. However, the cap of ₹2.5 lakh on the annual premium of ULIPs would apply only to plans bought on or after February 1, 2021.

New Unit Linked Insurance Plan (ULIP) Plan Tax Exemption

The new government ULIP taxation law will only apply to future new ULIPs as ULIP income tax exemption, so you won’t have to worry about your current ULIPs, where you may continue to invest your premium until the policy matures. On the other hand, purchasing numerous policies will not assist with new ULIPs.

Here are some of the new ULIP taxation rules of ULIP from February 2021 onwards.

ULIP returns can be taxable

Return on ULIP was not taxable if the annual investment did not exceed 10% of the life cover in the plan. If you have started two ULIPs after Feb 2021 and the annual premium exceeds ₹2.5 lakh, then the ULIPs will be taxable.

Restrictions on fund switch

As there is a feature to switch between ULIPs in most of the plans. While earlier, the switch was free, as per the new rule, the switch is now taxable.

Less than 3 years - chargeable as per the slab rate

More than 3 years - Chargeable at 20%

ULIP Exemption Changes and Their Popularity

ULIPs remain an appealing investment choice, notwithstanding the increased tax rules. To begin with, ULIPs combine the protection of life insurance, with the potential for larger investment returns. This ensures your family’s safety while also providing the best long-term returns. Furthermore, on premiums up to ₹1.5 lakhs, ULIPs continue to be tax-free. Moreover, the death benefit is still tax-free under Section 10 (10D) of the Internal Revenue Code.

Finally, unlike the intricate equity-linked market investing choices, ULIP plans are simple to grasp. As an investor, you’ll have a simple and painless time matching your fund allocation to your risk tolerance and financial objectives.

Conclusion

ULIPs are a popular choice among individuals, regardless of the previous and new ULIP tax exemptions. However, before you get your hands on this plan, ensure it’s compatible with your budget and personal goals.

Key takeaways

    The funds you choose and the quantity you choose will determine the taxes you will pay on your ULIP returns.

    a. Your funds will be taxed as equity mutual funds if the equity portion exceeds 65%.

    b. 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.

    b. Investments in equity funds are exempt from long-term capital gains (LTCG) up to ₹1 lakh. Taxes will be charged on any sum in excess of that.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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