The ULIP meaning is a life insurance policy with the added advantage of investment. When you pay a premium for a ULIP, the insurance company invests the amount in different funds, such as equity and debt, after deducting applicable charges. Due to these dual benefits and flexibility, ULIP has been a popular choice among Indian investors. Using an online calculator, you can get a clear idea about how much return you can expect from your policy and witness how its long-term profits can help you create substantial wealth.
Another aspect of ULIP that makes the policy profitable is its tax exemptions. Section 80C of the Income Tax Act, 1961, allows up to a maximum yearly deduction of INR 1.5 lakh on the premium paid for your ULIP. The death benefit of the ULIP is also tax-free under Section 10 (10D). Until last year, the maturity payout of ULIP was also tax-exempt. While the returns derived from other market-linked investment options have always been taxed, ULIP was the only exception with this benefit, as it is essentially a life insurance policy. However, Budget 2021 has changed that.
The government has now proposed a tax on ULIP’s maturity returns. Returns earned from mutual fund investments are considered long-term capital gains, as they are equity-based investments, which was not the case with ULIPs. ULIP’s maturity benefits are to be treated as long-term capital gains, and you have to pay tax on the income. The good news is the new taxation rule is applicable only if your ULIP’s yearly premium is over INR 2.5 lakh. Investors, who pay under INR 2.5 lakh in premiums towards ULIPs annually, continue to receive a tax-free maturity benefit.
Many investors are confused with the new tax regime if ULIPs are still profitable over mutual funds or other equity-linked investment instruments. Here, we explain why you should not dismiss ULIPs as a route to grow your money.
The new taxation rule does not affect everyone equally.
The most important thing to remember is that the new tax clause is applicable only if you pay more than INR 2.5 lakh as a yearly premium. For investors who use the ULIP purely as an investment instrument and put over INR 2.5 lakh per year in the fund, the change in taxation might be significant. Investing less than that means there is no reason to worry about these changes. For someone investing not more than INR 20,000 a month, ULIPs are still more profitable than other equity-based investment options. With the investment, you can earn lucrative ULIP returns in 10 years without paying any tax on the profit.
If you are wondering how to proceed with higher investments in ULIPs without paying any long-term capital gain tax, there is an idea to tackle the new rule. You can ask your family members to purchase ULIP policies and invest money in them. This way, you can still create wealth without worrying about paying more taxes.
Other advantages of ULIP
While high ULIP returns in 10 years are a valid reason to invest in it, the policy also offers many other benefits. The fund-switching facility is one feature of ULIP that makes it a flexible choice. It permits you to reallocate your money among equity and debt funds per your changing needs, allowing you more control over the investment.
Additionally, ULIPs offer a life cover, which you can use to secure the financial future of your loved ones. With ULIP’s life insurance offering, you can ensure your dependents achieve their life goals if you cannot.
Now that you understand why ULIPs are still an excellent investment option, it is time to find the right policy. While choosing a ULIP, it is wise to use an online ULIP return calculator to compare the prices of different plans and determine the estimated gains. Doing this allows you to get an appropriate policy at a cost-effective rate.