Articles 306 views February 2, 2021

Finance Minister Nirmala Sitharaman announced a change in the tax exemption norms for Unit-linked Insurance Plans (ULIPs) while presenting the Union Budget 2021. According to new rules, the maturity benefit of ULIPs will no longer be eligible for tax exemption if the annual premium amount exceeds INR 2.5 lakh. Currently, as per Section 10(10D) of the Income Tax Act, 1961, the maturity proceeds of ULIPs are exempt from tax. However, the new tax exemption norms for ULIPs don’t apply to death benefits. It means your death benefit will continue to stay exempted from tax. Let’s read the page below and know how these tax exemptions norms will apply to ULIPs.

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How Will the Tax Exemption Norms Apply to ULIPs?

According to Budget 2021, the new tax exemption norms for ULIP will apply to policies that are purchased on 1st February 2021 or thereafter. So if you have purchased a ULIP before 1st February 2021, this norm will not apply to the maturity benefit of the concerned ULIP. The maturity proceeds will get taxed at 10%, except the annual exemption of INR 1 lakh.

As stated above, no tax exemptions are there for ULIPs with an annual premium of more than INR 2.5 lakh. That might make you go for multiple ULIPs with a premium of less than INR 2.5 lakh to get an exemption. But if you consider the budget speech, it’s the aggregate premium (a combination of all the premium amounts of different ULIPs) that the tax authorities will consider. So, if the aggregate premium exceeds INR 2.5 lakh in a year, the maturity proceeds will get taxed.

An example below will help you understand the tax implications better.

Example – You purchased a ULIP plan after Feb 1, 2021, with a premium of INR 3 lakh and for 10 years. The total premium outgo will be INR 30 lakh. If you receive INR 50 lakh at maturity, how will the change in tax exemption norms impact you?

Maturity Benefit (In INR) (A)Amount Exempted from Tax (In INR) (B)Amount on Which Tax Would Apply (In INR) (C)Percentage of Tax on Your Maturity Amount (D)Tax to be Charged (In INR) (E)Amount You’ll Receive Post Tax Deduction (In INR) (A-E)
50,00,0001,00,00049,00,00010%4,90,00045,10,000

Note – If you had purchased the ULIP plan before Feb 1, 2021, you’ll receive the full maturity benefit of INR 50 lakh. ULIP returns are subject to market risks.

Is There Any Capping on the Premium Amount?

As per the Budget 2021, there will be no capping on premium payment on ULIPs under the existing Income Tax Act, 1961. And the change in the ULIP tax exemption is brought to reduce the instances of high net worth individuals claiming exemption by investing more in ULIPs. So this change in the ULIP tax exemption norm will bring a fair play in ULIP investments.

How Does the Change in Tax Exemption Norms for ULIPs Impact Partial Withdrawals?

You should know that in ULIP, you can make partial withdrawals from your invested funds after a lock-in period of 5 years. But from now onward, your ULIP will attract Securities Transactions Tax (STT) on redemption. So if you make withdrawals from your policy fund, you will get the amount after the deduction of STT, provided the annual premium is more than INR 2.5 lakh.

Does the Change in Tax Exemption Norms Impact Other Benefits?

Tax benefits not only apply to maturity proceeds but also the premium amount. So, the tax deduction of upto INR 1.5 lakh on premium payment under Section 80C is still applicable.

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