The idea of a Unit-Linked Insurance Policy (ULIP) was established in an effort to make insurance plans a little more profitable in terms of rate of return. In this, a portion of the premium is invested in life insurance, while the majority is invested directly or indirectly in the stock market.
Consider, for example, that you invested in an insurance policy with a 10-year maturity period, after which you will get a specified sum. Any returns you received at the maturity of a ULIP plan prior to February 1, 2021, were exempt from taxation under Section 10(10D) of the ITA. Also, you might use Section 80C to claim ULIP tax benefits.
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.
Finance Tax Amendment, 2021
The Finance Act of 2021 amended Section 10(10D) to incorporate a few new provisions, which became effective on February 1, 2021.
This means that certain ULIP plans will no longer be exempt in the following scenarios:
The policies must be issued on or after February 1, 2021, and if you paid an insurance premium of at least Rs 2.5 lakh in any of the prior years, the amount you get at maturity (including any bonus) would be taxable. If a person has purchased numerous ULIP plans and the total amount paid exceeds Rs. 2.5 lakh, that person is subject to ULIP Taxes.
ULIPs will be subject to the same long-term capital gains (LTCG) tax as all equity-oriented investments. Moreover, the tax must be paid at a 10% rate in the case of long-term capital gains (LTCG). Nonetheless, there is no taxation levied in the event of a person’s passing away.
In a nutshell, ULIP plans are now comparable to stocks or mutual funds.
Let’s look at real-world situations to further understand how the ULIP tax benefits will be applied:
Mr. A and Mr. B invested in a ULIP plan with respective values of Rs. 15 lakh and Rs. 30 lakh and a 10-year maturity duration. Mr. A pays an annual premium of Rs. 85,000, but Mr. B pays an annual premium of Rs. 2.6 lakh. Mr. A receives Rs. 20 lakh in maturity earnings after 10 years, while Mr. B receives Rs. 48 lakh.
Mr. B’s annual premium for the duration of this insurance surpasses Rs 2.5 lakh. Mr. B must pay taxes on Rs. 18 lakh (i.e., Rs. 48 lakh less Rs. 30 lakh) since he was contributing more than Rs. 2.5 lakh annually, while Mr. A will be excused from paying taxes under Section 10(10D) because the yearly premium was Rs. 85,000 throughout the policy’s term. (Presuming no single contribution on or after February 1, 2021, exceeded Rs 2.5 lakh).
The consideration under only those qualified ULIPs (where the total premium to be paid is smaller than Rs 2.5 lakh for any of the financial years during their tenure) shall be free from tax under Section 10 in situations where multiple ULIP earnings are received during the year (10D). Thus, the consideration obtained under ULIP Z will not be exempt under paragraph (10D) since the aggregate of the yearly premium payable for ULIP X, Y, and Z surpasses Rs 2.5 lakh during the duration of these policies.
Due to the fact that the combined annual premium for the two policies is not greater than Rs 2.5 lakh for any financial year for the term of these two policies, the consideration received under ULIPs X and Y shall be exempt under clause (10D).
You can use a ULIP Calculator to estimate future returns.
Taxability according to the ITA’s Section 10(10D)(5) Fifth Proviso:
Since the ULIP A insurance was issued before February 1, 2021, the consideration under it will be exempt under clause (10D).
The consideration received under ULIP Z will not qualify for exemption under clause (10D) because the total annual premium for ULIP X, Y, and Z during the duration of these policies exceeds Rs 2.5 lakh.
Due to the fact that the combined annual premium for ULIPs X and Y is not greater than Rs 2.5 lakh for any financial year for the term of these two policies, the consideration received under these two policies shall be exempt under clause (10D).
The consideration under only those eligible ULIPs (as per the rules, where numerous ULIP proceeds are obtained during the year, shall be exempt from tax under Section 10(10D), where a total of the amount of the premium owed does not exceed Rs 2.5 lakh for any of the financial years during their term) shall be excused from tax under Section 10(10D).
