From 2018 to 2021, Ulips had change into the favourite of many (principally HNIs) due to the unique tax-free standing they loved when in comparison with the then newly introduced LTCG taxation of mutual funds. However this was modified in 2021 when the Funds 2021 introduced that Unit Linked Insurance coverage Plans (ULIPs) will now even be taxed.
As per the new rule about ULIP taxation – If you happen to purchase a ULIP with an combination annual premium that exceeds Rs 2.5 lac in a monetary yr, then the maturity proceeds (or any type of pay-out besides dying profit) from such ULIP can be taxable. Do notice that this rule got here into impact on 1st February 2021 and older ULIPs bought earlier than that day weren’t affected by this rule change.
Let me take a couple of examples that can assist you perceive this:
- You bought ULIP Insurance coverage in 2017 and are paying Rs 5 lakh in the direction of the annual ULIP premium – Any pay-outs from the ULIP will proceed to be exempted from tax so long as the Sum Assured is greater than 10 instances the annual premium.
- You bought a ULIP in 2017 and are paying Rs 5 lakh in the direction of the annual ULIP premium. You once more bought a brand new ULIP in March 2021, with a premium of Rs 2 lakh – Any payout from the outdated ULIP will proceed to be exempted from tax. Additionally, the payout from the brand new ULIP can be tax-exempted because it’s lower than the Rs 2.5 lakh threshold for activation of the brand new tax rule.
- You bought a ULIP in 2017 and are paying Rs 5 lakh in the direction of the annual ULIP premium. You once more bought a brand new ULIP in August 2021, with a premium of Rs 6 lakh – Any payout from the outdated ULIP will proceed to be exempted from tax. However the payout from the brand new ULIP can be taxable because it’s greater than Rs 2.5 lakh.
Notice: Regardless of when the ULIP is bought or what’s its premium, .e. for each outdated ULIPs and new ULIPs, the dying profit can be exempt from taxes.
Everyone knows ULIP is a hybrid product that provides each funding and insurance coverage. And until just lately, it was a well-liked product amongst HNIs because of the tax benefit it had over mutual funds. Earlier than the rule change, the buyers had been allowed to modify between fairness and debt with none tax incidence within the center and this was the primary benefit of the ULIPs. However with the rule change for top premium ULIPs, there is no such thing as a strategy to go for tax-free rebalancing for HNIs by way of ULIPs now.
Although I’m not in favor of mixing insurance coverage and investments, ULIPs are nonetheless higher than conventional endowment or moneyback plans from insurance coverage firms. And I’m positive that you realize why. I’ve written about it a number of instances and therefore, don’t suppose it requires repetition.
In case you are contemplating ULIPs for all times insurance coverage*, it’s higher to do it by way of plain and easy time period plans. You will get a Rs 1 crore time period plan for only a few thousand rupees in the event you aren’t very outdated.
* Learn extra about how completely different life insurance coverage choices are taxed in India.
In case you are contemplating ULIPs as investments, then there are mutual funds that do not need excessive bills which can be a part of ULIPs attributable to their varied prices. If in case you have some very distinctive want that requires a mixture of the 2, and you understand how ULIPs are structured and the way they cost their buyers, solely then get into it. And in the event you accomplish that, then hold these items in thoughts when buying a ULIP bundle on-line:
- Contemplate your monetary aims – As a result of ULIP plans are versatile, you could direct the place your cash is invested. If you purchase a ULIP, you might be given an inventory of funds that spend money on debt, fairness, or a mixture of the 2. Step one in any information to selecting a ULIP plan is to make sure that you perceive your life aims and monetary calls for to be able to purchase a ULIP plan on-line that meets these standards.
- Choose satisfactory funding time period – Like some other product, right here additionally you have to keep invested for lengthy to get the facility of compounding to maximise your beneficial properties. Whereas shopping for a ULIP scheme obtainable on the web, you might be given a 5-year lock-in interval. Primarily based on the coverage provisions, a give up worth could also be obtained after three years, and provisional withdrawals could also be permitted after 5 years. BU inspite of the exit possibility availability, staying invested for lengthy is the best way to go, identical to it’s mutual funds.
- Contemplate the fees levied – It’s pivotal that you just make investments your cash along with your eyes huge open so you realize precisely what you may be stepping into and what you stand to achieve once you purchase a ULIP plan on-line or offline. Insurers levy particular prices widespread to all ULIPs below the headings of fund administration charges, mortality prices, service prices, administration charges, premium allocation prices, discontinuation or give up prices, and many others. Some insurers levy all of those prices, whereas others don’t. Make a well-informed alternative after contemplating the fees once you purchase ULIP on-line.
That’s it. However in the event you nonetheless have doubts about whether or not you want ULIPs or not, then please get in contact with an excellent funding advisor who can plan your funds correctly and resolve the place it is best to spend money on ULIPs or not.
Notice – Do learn my column in Morningstar about ULIPs right here.
In order that was in regards to the taxation of ULIPs in India (2021-22).
