ULIP advantages are numerous and diverse that come of great help. There are various reasons to invest in ULIP plans, from providing you with the combined benefits of insurance and investments to assisting you in harnessing the power of compounding and earning market-linked ULIP returns. There are numerous additional ULIP tax benefits in addition to these advantages.
Let’s first take a closer look at how ULIPs function in order to better appreciate the tax-related ULIP benefits.
How do ULIPs function?
In addition to the benefits of investments, unit-linked insurance plans give policyholders the benefit of a life cover. The insurance requires monthly premium payments from policyholders. The insurer provides coverage to the policyholder so that, in the terrible event of the latter’s passing within the term of the plan, the nominee is qualified to receive the offered death benefits. That takes care of the insurance part. 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.
When purchasing a Unit Linked Insurance Plan, policyholders have a variety of ULIP funds to choose from for their investment. There are equity funds and debt funds as choices. The market-linked gains from these investments are distributed to the policyholder at the time of maturity. These are the advantages of maturity.
ULIP tax advantages
ULIP tax benefits can be used in three different ways. Let’s take a look at them:
- Tax benefit on premiums:Section 80C of the Income Tax Act of 1961 allows you to deduct up to Rs. 1.5 lakh of the premiums you pay for your ULIPs each financial year from your total income. If the policy does not meet the requirements of Section 10(10D), the amount of the Section 80C deduction is limited to 10% of the capital sum assured for policies issued on or after April 1, 2012, and to 20% of the capital sum assured for policies issued before to April 1, 2012.
- Tax advantages at maturity:The Income Tax Act of 1961, Section 10(10D), specifies these advantages. Let’s examine the ULIP tax advantages for maturity in more detail.
Benefits of ULIP taxes upon maturity
The advantages of ULIP plans maturity were completely tax-free up until Budget 2021, provided that the requirements outlined in Section 10(10D) of the Income Tax Act of 1961 were met. We may therefore separate the taxability of the benefits associated with the maturity of ULIPs into two main categories now since we are on the other side of the budget for FY22:
- Taxability for ULIPs issued before February 1, 2021
- Taxability for ULIPs issued on or after February 1, 2021
- ULIPs issued before February 1, 2021
The returns on the maturity of ULIPs are tax-free according to section 10(10D) of the Income Tax Act of 1961. For policies acquired after April 1, 2012, this is only valid if the yearly premium is less than 10% of the capital sum assured (for plans purchased prior to the aforementioned date, it is 20%). As a result, ULIPs issued prior to February 1, 2021, qualify as EEE tax-saving devices.
- ULIPs issued on or after February 1, 2021
The budget for FY 2021–22 stated that for ULIPs issued on or after February 1, 2021, the proceeds from the plan will now be taxable as a capital gain at the time of policy payments if the aggregate premium exceeds Rs. 2.50 lakhs in any financial year throughout the life of the policy. Any sum received by the nominee at the time of the policyholder passing away would be an exception to this rule because it would not be subject to taxation. It should be noted that top-up premiums will also be considered when calculating the annual premium. You can use a ULIP Calculator to estimate future returns and the value of a ULIP investment. Death benefits under the Keyman policy will be taxed (Employer-employee policy).
Long-term capital gains that are calculated on ULIP proceeds issued on or after February 1, 2021, and exceed Rs. 1 lakh is also subject to 10% taxation. Keep in mind that this only applies if all ULIPs are regarded as equity-oriented funds. However, more information is expected from the government.
As a result, if you currently have a ULIP, you can take advantage of all the tax advantages that were in place before the Budget 2021 adjustments. Subject to the modifications made, you may still use the ULIP tax benefits on the ULIP returns if you bought a ULIP on or after February 1, 2021.
The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.