A Comprehensive Overview of ULIP Taxation in the New Regime
New Delhi (India), January 23: ULIPs (Unit-Linked Insurance Plans) have been a popular long-term investment option in India, combining the features of life coverage and market-linked returns. However, the Union Budget of 2021 introduced some changes to the taxation of ULIPs, bringing them in line with other tax-efficient investment options such as Equity-Linked Saving Schemes (ELSS) and National Pension System (NPS). This has to be understood closely with a few illustrative examples. These are highlighted below for your perusal. You should also get more details about the new taxation regime to plan your investment carefully.
What the amendment says
The Finance Act of 2021 has now come out with specific provisions via amendments to Section 10 (10D), effective from 1st February 2021. As a result, ULIP proceeds will not have tax exemptions any longer in case of these conditions:
• If the policies are issued on 1st February 2021, or after this date, and-
- •The customer has paid a premium amount of more than Rs. 2.5 lacs for any of the earlier years, then the amount received at maturity is taxable.
- •The customer has bought multiple ULIP plans and the aggregate premium paid exceeds Rs. 2.5 lacs, then it will be taxed.
Keep these aspects in mind before you purchase any ULIP plan. Did you know that ULIPs also attract LTCG and STCG as per the new taxation rules? Learn more about it below.
LTCG/STCG on ULIPs
ULIPs that fail to meet the tax exemption criteria specified in the new tax rules are now also subject to LTCG (long-term capital gains) taxes, just like all other equity-based investment options. This is payable at 10%, yet taxes are not imposed if the proceeds are received after the policyholder’s demise. LTCG, with a holding period of more than twelve months, is 10% if the gains exceed Rs. 1 lacs. STCG (short-term capital gains), with a holding period of twelve months or lesser, will be taxed at 15% on the total gains.
Here are a few examples that will give you a better idea of how maturity proceeds from ULIPs are taxed.
A few examples of ULIP taxation
Consider a scenario where Mr Ravi purchases a ULIP plan with a policy duration of 10 years and a sum assured of Rs. 20 lacs. Mr Joginder buys a plan for the same period, with a sum assured of Rs. 40 lacs. Mr Ravi pays Rs. 90,000 annually, while Mr Joginder pays approximately Rs. 2,70,000.
After 10 years, Mr Ravi gets Rs. 30 lacs, while Mr Joginder receives Rs. 50 lacs. In this case, Mr Joginder has been paying more than Rs. 2.5 lacs per year for this entire period. Mr Joginder will be paying taxes on Rs. 10 lacs (Rs. 50 lacs (-) Rs. 40 lacs). Mr Ravi will, however, get an exemption on his maturity proceeds under Section 10 (10D) since his annual premium is lower than Rs. 2.5 lacs throughout the policy tenure.
Suppose Mr Rakesh purchases three ULIPs with the following information-
•ULIP 1- Sum assured of Rs. 10 lacs with an annual premium of Rs. 65,000 and Rs. 15 lacs as the final consideration sum received.
•ULIP 2- Sum assured of Rs. 20 lacs with a premium of Rs. 1,75,000 annually and final consideration received of Rs. 25 lacs.
•ULIP 3- Sum assured of Rs. 35 lacs with an annual premium of Rs. 3,50,000 and a final consideration amount of Rs. 45 lacs.
In this case, the first two ULIP proceeds will be tax exempted since the combined annual premiums are well below Rs. 2,50,000. However, the ULIP 3 of Mr Rakesh will be taxable since the annual premium exceeds Rs. 2,50,000. Hence, in this case, a sum of Rs. 10 lacs (Rs. 45 lacs (-) Rs. 35 lacs) will be taxable on the third policy for Mr Rakesh. Even if Mr Rakesh had an annual premium amount of Rs. 2.5 lacs and not a single rupee more, then there would be no taxation on the maturity proceeds.
This gives credence to the theory that investors should carefully examine their ULIP premium amounts in relation to the value and sum assured. This can be done through an online ULIP calculator as well. A better strategy could be to add multiple ULIPs to the portfolio, with the aggregate premiums staying within Rs. 2.5 lacs. In some cases, where the anticipated returns are far higher, investors may also not mind the taxes. Consult your financial advisor for more guidance in this regard.