Finance

All About ULIPs Under the New Finance Act, 2021

ULIPs are hybrid investment vehicles where the premium paid by the policyholder is divided into two components.

While one part of the premium is used to provide insurance cover, the other part is invested in various funds to create wealth for the policy buyers.

The popularity of Unit Linked Insurance Plans (ULIPs) has soared in the past few years as they provide the double benefit of insurance and investment. Besides, ULIP also offers tax benefits under Section 80C and Section 10 (10D).

But the Finance Act 2021, presented during the Union Budget 2021-22, has introduced new rules for ULIP that can affect its tax benefits. You should be aware of these rules to understand why ULIPs still remains a viable option post the Finance Act 2021.

New Tax Exemption Rules under Finance Act, 2021

  • No Tax Exemption on High Premium
  • Fourth Proviso to the Section

The maturity amount from ULIPs bought on or after 1 February 2021 will not be eligible for tax exemption under Section 10 (10D) if the total annual premium paid during the entire policy tenure exceeds Rs 2.5 lakhs in any year. The proviso applies to a single policy.

  • Fifth Proviso to the Section

In case of multiple ULIPs bought on or after 1 February 2021, tax exemption on the maturity amount under Section 10 (10D) will be applicable only if the aggregated amount of annual premiums paid for all the ULIPs is within the limit of Rs 2.5 lakhs in any year.

The maturity amount will be considered taxable if the premium paid during the policy tenure exceeds the threshold of Rs 2.5 lakhs in any year.

  • No Change in Tax Exemption for Old ULIP Premiums

Individuals who bought ULIPs before 1 February 2021 will keep getting the Section 10 (10D) tax exemption on the maturity amount irrespective of the premium amount paid.

But suppose you bought two ULIPs, one before 1 February 2021 and another after. In that case, tax exemption on the maturity amount will not be applicable for the new policy if the combined annual premium paid for both policies crosses the limit of Rs 2.5 Lakhs.

How Do the New Rules Affect ULIP Buyers?

  • It is evident that investors who bought their ULIP before 1 February 2021 need not worry as these changes do not apply to them.
  • Very few individuals invest more than Rs 2.5 lakhs annually in ULIPs. Therefore, only the high net worth individuals will face the increase in tax liabilities. The majority of ULIP buyers are likely to remain unaffected by higher tax liabilities.
  • Tax deduction of Rs 1.5 lakh per annum under Section 80C has remained unchanged.

ULIP- Still a Good Investment Vehicle

You must remember that the primary purpose of a Unit-Linked Insurance Plan is to create long-term wealth creation while providing insurance cover and protecting your capital.

Thus, the goal of ULIP remains unchanged for you even after the introduction of new rules. So, losing too much sleep on the new rules would be unwise. Instead, focus on achieving your financial goals through ULIP.

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