ULIP Taxations: Updated Tax Rules, Benefits, Charges, and Fees Explained

ULIPs are a financial product that provides both the benefits of life insurance as well as market-based returns. Given the recent updates in tax rules, investors need to understand ULIP taxation, its benefits, and associated charges/fees in order to make informed investment decisions.
ULIP Taxations
ULIP Taxations

ULIPs (Unit-Linked Insurance Plans) are a financial product favoured by people looking for financial security for their family members and capital growth simultaneously. ULIPs combine life insurance and investment, making insurance policies more lucrative when it comes to the rate of return. Here, the amount of premium paid is partly diverted to life insurance, while a major portion is directly or indirectly invested in the stock market. Moreover, maturity proceeds on ULIP are taxable as LTCG (Long-term capital gains tax) such as the LTCG tax on all equity-oriented investments. With recent updates in tax rules, understanding ULIP taxation, its benefits, and associated charges is crucial for making informed investment decisions.

But first, let’s understand what are ULIPs:

Essentially, ULIPs are a financial product that provides both the benefits of life insurance as well as market-based returns. So when you go for it, this is what comes in the plan:

a) Life Insurance Cover: A dedicated sum of your plan is payable to the nominee in the event of death.

b) Investment: A dedicated sum of your plan goes for investment in various types of funds like Equity Funds, debt funds, or balanced funds based on your risk appetite.

1. Updated Tax Rules For ULIPs

Before February 1, 2021, the returns received on the maturity of a ULIP plan were tax-free under Section 10(10D) of the Income-tax Act. The policyholders could also claim a tax deduction under Section 80C.

The Finance Act 2021 introduced changes to the taxation of ULIPs, especially high-premium ones:

ULIPs Taxability Based on Premium (On Policies Issued Before and After 1st February 2021):

Before: The maturity proceeds of ULIPs were tax-exempt under Section 10(10D) of the Income Tax Act, given the annual premium does not exceed 10 per cent of the sum assured.

After: Currently, for the policies where the annual premium exceeds Rs 2.5 lakh, the maturity proceeds are taxable as capital gains. Say, you have invested in multiple ULIPs and your aggregate premium paid exceeds Rs 2.5 lakh in a financial year, the proceeds there also will be taxable.

Capital Tax Gains

ULIP proceeds that are taxable get the same treatment as capital gains tax. Equity-oriented ULIPs are taxed at 10 per cent for gains exceeding Rs 1 lakh, while non-equity-oriented ULIPs are taxed at 20 per cent with indexation benefits.

Exemption for Death Benefit:

The death benefit received by the nominee of the policyholder is tax-exempt under Section 10(10D), regardless of the premium amount.

2. What are the Tax Benefits under ULIPs?

- Premiums paid towards ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, up to Rs 1.5 lakh per financial year.

- Upon the maturity of the policy term, maturity proceeds you receive become tax-exempt under Section 10(10D).

- In the event of the death of the policyholder, the insurance payout is also tax-free.

Did you know? After the completion of the lock-in period ( which is typically five years), ULIPs allow partial withdrawals, which can be useful for meeting financial emergencies or goals.

What are the Charges and Fees Associated with ULIPs?

While investing in ULIPs, investors/buyers must familiarise themselves with charges and fees associated with the same such as mortality charges for the life insurance cover and fund management fees for handling your investments.

- Mortality Charges are fees for the given life insurance cover

- Sometimes, a Fund Management Fee is levied by the insurance provider for managing your fund portfolio

- Make sure to learn about the ‘Surrender Charges’ should you decide to exit the plan before the lock-in period ends.

- There may be some ‘Switching Charges/fees’ for moving your capital between different types of funds within the ULIP. The charges, if applicable, would vary based on your insurance provider and the specific plan option you chose.

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