Business Julia Jacquet  

Ulip Will No Longer Be Fully Tax Free: Should You Still Consider Investing?

Budget 2021 has come up with new tax rules regarding ULIPs, which has left the investors in anxiety. Should you still invest in ULIPs irrespective of the changes made in the tax structure? Read on to know the tax changes made in ULIPs and if it is still beneficial to invest in ULIPs.

Investors who fall in the higher tax bracket considered investing in ULIPs as a good option. Not only did they benefit from higher returns but also from tax advantage Under Section 10(10D). Recently with the changes in the New Tax Structure, investors are still in dilemma whether to continue investing in ULIPs or not.

What Are The Changes Done In New Tax Structure for ULIPs?

According to the new tax structure, if the annual premium of the ULIPs crosses 2.5 lakhs, the returns on the premium will not be tax-exempt any more. The tax-exempt will only be available for the maturity amount under the Section 10(10D). The income/ returns earned above 2.5 lakhs premium will be treated as a capital gain and will be taxable under Section 112A.

The new rules are not applicable for existing ULIPs but is applicable for new ULIPs. So, you can continue investing the premiums for your existing ULIPs. But in case you are planning to buy multiple new ULIPs, the aggregate premium needs to be cumulated to the threshold of 2.5 lakhs.

What are the tax treatments?

The ULIPs that are subscribed after the budget Feb 1st- 2021 will be similarly taxed as per the Equity oriented Mutual fund. The capital gain tax will be charged as per equity oriented Mutual fund such as (10% exceeding Rs. 1 lakh).

In case of sale or redemption of a single unit of ULIPs security transaction tax is proposed for Equity- oriented fund.

Should you buy ULIPs after the amendment?

Though many investors advise going for a separate Equity-oriented fund and insurance plan, unless you are a savvy investor investing in equity for long-term capital growth can go haywire. Although the competition for ULIPs is far lesser than the Mutual funds in terms of liquidity, the switch in different funds within the scheme is possible only in case of ULIP funds. The Equity fund universe is quite wide and for a lay investor choosing the right fund may be difficult.

So, in case your investment is within the 2.5 lakh premium threshold you can easily choose to invest in the ULIPs.

You can get a waiver of premium benefit on Child ULIP plans if the policyholder meets an unfortunate death. Few ULIP plans also provide critical illness benefits and health riders, making them a powerful asset to invest.

ULIPs also help to optimise the insurance cost which is not possible in case of term plans. As the investment accumulates and grows, you pay lesser while you keep paying the same amount due to asset accumulation over the years in case of Term plans.

While investors need to thoroughly plan before investing in ULIPs as the new guidelines are only applicable for big ticket investors and not for small or medium investors.