What is the Taxation of ULP?

Last Updated On: Feb. 2, 2022, 11:13 p.m.
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TAXATION OF ULIP EFFECTIVE FROM 01.02.2021

What is Unit Link Insurance Plan (ULIP)?

A Unit Link Insurance Plan (ULIP) is an investment product that helps the investor to claim an 80C deduction.

The two main pillars of wealth management is  having an

  • Insurance (medical and term both)
  • Investing in equities.

 

How does ULIP Works?

When you make an investment in ULIP, the insurance company invests part of the premium in shares or bonds etc., and the balance is utilized in providing an insurance cover. They are fund managers in the insurance companies who manage the investments and therefore the investor is spared the hassle of tracking the investments. ULIPs allows you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of the market's performance.

 

Why you should invest in ULIP?

1. Helps in Long term Goals:

If you have long-term goals like buying a house, a new car, marriage, etc., then ULIP is a good investment option because the money gets compounded. As a result, the net returns are generally more. This stands true even if you want to exit after the 5 year lock-in period in comparison to not having invested the amount at all and retaining it in a savings account or in the form of an FD

2. Income Tax Benefits:

The premium paid towards a ULIP is eligible for a tax deduction under Section 80C. Additionally, the returns out of the policy on maturity are exempt from income tax under Section 10(10D) of the Income-tax Act. This is a dual benefit that you can claim with this policy.

3. The flexibility of a portfolio switch:

 As already mentioned, ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of how the market is performing. Insurance companies, on the other hand, allow a very few numbers of switches free of cost.

 

Amendment of provisions under Income Tax Act,1961.

 Finance Act 2021 has amended provisions of the Income Tax Act 1961 (Act) in relation to taxation of Unit linked insurance premium (ULIP) paid and amount received on or after 1st February 2021. We are discussing herewith changes in section 10(10D) and 45(1B) of the Income Tax Act along with latest notification issued in relation thereof.

Section 10(10D): Any sum received under a life insurance policy including the sum allocated by way of bonus on such policy is exempt subject to certain conditions.

 

Section 10(10D) explains that the amount received in pursuance of the fourth and fifth proviso as mentioned above is chargeable to tax. Sub-section (1B) of section 45(1) has been inserted under the Act to explain the taxability for the sum received including bonus allocated under the policy.

Sub-section (1B) of section 45(1):  Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.

 

Clarifying the various aspects and concerns over the taxation of ULIP redemptions in certain cases, the official said the move was made after it was found that ULIPs were being preferred by investors for investment purposes as compared to insurance.

"In case of mutual funds, its redemption is charged to capital gains tax. However, in case of ULIP, the redemption was exempt, even though the insurance part of the premium was very less and the investment part of the premium was high

 

 

 

Points to be noted down:

1. ULIP policy should be issued on or after 1st Feb 2021.

2. Income shall be chargeable under the head capital gain  in the year of receipt.

3.Income shall be  chargeable to tax only if premium payable for one ULIP or sum of ULP exceeds Rs.2,50,000.

 

 

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