What is a ULIP?
Unit Linked Insurance Plans popularly known as ULIPs are considered a good investment option as it is an optimal combination of insurance coverage and investment avenue. From the total premium paid towards ULIP, some portion is utilized for insurance cover and the remaining portion is utilized for investment.
There are various ULIP plans available for an investor, which are similar to mutual funds.
In budget 2021, the Finance Minister announced the revision in the limit of premiums for determining ULIP Taxation.
So, let’s understand ULIP taxation before and after the 2021 budget announcement:
- The limit of ₹2,50,000 is to be considered for premiums paid on a single policy or aggregate of premiums paid on multiple policies for a particular PAN during the term of policies purchased after 1 Feb 2021.
- Any maturity proceeds received by the nominee at the time of death of the policyholder will be exempted u/s 10(10D) even if the premium paid on such policy exceeds the limits specified.
Let’s understand better with the help of an example.
On April 1, 2022, Ms. Singh purchased a ULIP policy assuring a sum of ₹50,00,000 on which she pays a premium of ₹2,00,000 every year during the term of the policy. On July 1, 2022, she purchased another policy assuring a sum of ₹10,00,000 on which she pays a premium of ₹1,00,000 every year during the term of the policy. What shall the tax implications?
Ms. Singh has purchased two ULIP policies, both after February 1, 2021 hence the maturity proceeds of the policies will be exempted u/s 10(10D) only if the premium paid for a single policy as well the as aggregate premium paid on both the policies **does not exceed ₹2,50,000 in any year during the term of the policy.
To understand taxation better let’s refer to the table below:
Since the policy was purchased on April 1, 2022 and Ms. Singh pays a premium of ₹2,00,000 which is less than the limits prescribed (i.e. ₹2,50,000), the maturity proceeds will be exempted u/s 10(10D). She is also eligible to claim a deduction u/s 80C up to ₹1,50,000.
For the policy purchased on July 1, 2022, the premium amount is ₹ 1,00,000. Therefore, the aggregate of premium of both policies (i.e. ₹ 3,00,000) exceeds the limits (i.e. ₹2,50,000). Now, Ms. Singh gets an option to choose to avail exemption in respect of any one of the two policies as an exemption in respect of both policies cannot be availed because the aggregate premium exceeds the limits specified.
It is advisable to claim the exemption in respect of the first policy as the maturity proceeds (i.e. ₹50,00,000) are higher than the maturity proceeds of the second policy (i.e. ₹10,00,000).
For the purpose of taxability, the maturity proceeds of the second policy shall be taxable under the head Capital Gain in the same way as the Listed Equity Instruments or Mutual Funds are taxed, i.e. @15% if it is Short Term Capital Gain and @10% on any amount above the exemption limit of ₹1,00,000 if it is Long Term Capital Gain.
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