Frequently Asked Questions On Taxations Of ULIPs

Certain unit-linked insurance plans will be taxed under the Finance Bill of 2021. (ULIPs). The relevant modification in the ULIP taxation regime is proposed by removing the exemption under Section 10(10D) in respect of such plans and taxing them under Section 112A of the Act as a result.

If the amount of premium payable for any preceding year throughout the life of the policy exceeds Rs. 2,50,000, it is suggested that no exemption under Section 10(10D) will be applicable for ULIPs issued on or after 01-02-2021. Furthermore, if a person pays premiums for multiple ULIPs, the exemption is only allowed for policies whose aggregate premium does not exceed Rs. 2,50,000 for any of the prior years throughout the term of any of the policies (hence referred to as 'high premium ULIP').

Only insurance plans issued on or after February 1, 2021, will be subject to the new ULIP taxation regime. All of your questions about ULIP taxation will be answered in this post.

Frequently Asked Questions On Taxations Of ULIPs

Below are a few frequently asked questions on Taxations Of ULIPs:

1. What Kinds Of ULIPs Are There? 

ULIPs can be used for a variety of purposes, including retirement planning, wealth growth, child education, and family security. ULIPs often offer single-premium or regular-premium payment choices. ULIPs are classified into four categories based on the types of portfolios in which the assurer's money is invested:

• Equity-Based Funds
• Debt-Based Funds
• Money Market-Based Funds
• Balanced Funds.

2. Is ULIP Investment Subject To A Lock-In Period?

The lock-in term for ULIPs is usually five years.

3. Is It Possible To Deduct ULIP Investments Under Chapter VI-A?

Yes, ULIP investments are eligible for a tax deduction under Section 80C. Individuals can deduct investments made for themselves, their spouses, or their children (dependent or independent), while HUFs can deduct investments made for any of their members. Section 80C allows for a deduction of up to 10% of the actual capital total guaranteed. It means that if a person pays an extravagant price for insurance, the deduction for the entire cost will not be authorized. The deduction will be capped at 10% of the sum assured, and any premiums paid in excess of this level will not be deductible under Section 80C. ULIP investments are usually made over a period of ten or fifteen years. Only if the taxpayer contributes to the ULIP during the first five years of the plan is the deduction available.

4. When Is A Section 10(10D) Exemption For ULIP Funds Available?

(Before the Budget)Section 10(10D) exempts any payment earned under a ULIP, including any bonus allocated on the policy. However, if the premium for any year during the policy's term exceeds 10% of the real capital sum assured, the money received under the policy will not be excluded under this provision. The term 'extra premium' is used to describe such a circumstance.

5. When Is It Permissible To Claim An Exemption Under Section 10(10D) For The Amount Received Through A ULIP?

In addition to limiting the exemption under Section 10(10D) for payment of excess premium, the Finance Bill, 2021 proposes to add a fourth and fifth proviso to Section 10(10D) stating that no exemption will be available under this section for ULIPs issued on or after February 1, 2021, if the amount of premium payable in any previous year during the term of the policy exceeds Rs. 2,50,000 (i.e., 'high premium' ULIPs). The fourth proviso states that no exemption will be allowed for a policy purchased on or after February 1, 2021, if the premium paid in any year during the policy's duration is less than the premium paid in the previous year.

Conclusion

A Unit Linked Insurance Plan (ULIP) combines insurance and investment in one package. The purpose of a ULIP is to provide wealth development as well as life insurance, with the insurance company investing a portion of your money in life insurance and the balance in a fund that is based on equity, debt, or both and meets your long-term goals. These objectives could include retirement preparation, education for your children, or any other significant event for which you wish to save.

You may also like to read - Things To Consider Before Purchasing A Unit-Linked Insurance Plan

How Is ULIP Different From SIP?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.