When the government introduced the proposal of tax rules on ULIPs, many people didn’t understand it. However, the new CBDT circular has made it easy to understand what the tax rules are.
Read on to know more about the tax rules on ULIPs.
A unit-linked insurance plan (ULIP) is a product that provides benefits of insurance and investment. When the insured person invests in a ULIP, a part of the premium is invested for life cover, and the remaining amount is invested in different investment instruments like equity and debt funds.
Investors can choose the fund options based on their risk appetite. For instance, high-risk investors should consider equity. This is because equity funds can provide them with higher returns. Hence, ULIPs can allow investors to accumulate significant funds and provide financial protection to the policyholder’s family. Therefore, ULIPs have become a preferred choice of many investors.
Benefits of ULIPs
- Investment Option for Every Type of Investor
As there are various fund options available in ULIPs, investors with different objectives can invest in them. There are high, low, and medium-risk investment options available in ULIPs. Investors can choose an option based on their risk appetite.
- Financial Protection
While ULIPs offer good returns, these policies also provide life cover. The nominees can receive the life cover amount in the event of the insured person’s demise. Hence, ULIPs are a good option for providing financial protection to the dependants.
- Helps in Accumulating Significant Funds
Apart from the benefit of life cover, an investor can accumulate funds with the help of a ULIP. For instance, if you opt for an equity fund option in ULIP, then your wealth can grow significantly over a period of time.
The New Tax Rules on ULIPs
In the Budget 2021, the government introduced new tax rules on ULIPs. However, many didn’t understand these rules. But CBDT (Central Board of Direct Taxes) have issued a circular to explain the tax rules.
As per the notification of the CBDT, the investors will not be able to get tax free income from ULIPs. The tax rules for computing capital gains earned by ULIPs are explained in the circular.
In the Budget 2021, there was a proposal that if the annual investment in a ULIP is above Rs. 2.5 Lakhs, then the ULIP tax benefits on returns can’t be availed.
This limit is applicable on plans purchased on or after February 1, 2021. Returns earned on ULIPs purchased before it are tax free. However, it was difficult to understand how taxation worked.
As per the new rules, tax exemption will be considered by adding the premiums of old and new ULIPs. In case the annual premium is above Rs. 2.5 Lakhs, the policyholder will not be eligible to claim it for tax exemption.
Understand the New Rules Before Investing in ULIPs
While ULIPs are a great investment option, it is important to understand the new tax rules before making an investment.
