ULIP Tax Benefits: ULIP Tax Exemption Under Section 80C

2024-08-02

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In recent times, ULIPs have become really popular instruments in India. Especially after the introduction of the LTCG tax under which they are the few exempt instruments, ULIPs are increasingly being recognized as an important part of financial planning.

What is a ULIP?

A Unit Linked Insurance Plan or ULIP is a unique plan which provides you an insurance policy along with an investment component. A part of your premium payment goes towards life cover, and the other part is invested in funds as your choice. Different insurance companies offer different choices of funds.

Best Ways to Minimize Income Tax through ULI

If you are looking to invest in a ULIP for the first time, an excellent choice would be Canara HSBC Life Insurance Invest 4G. It offers you a choice between 3 plan options, 4 premium payment modes, 8 different funds, and 4 different portfolio strategies. You have the freedom to choose a combination that suits your financial capabilities and future goals.

It is tax-saving season and ULIPs are gaining even more popularity now. The main reason is the EEE (Exempt-Exempt-Exempt) nature of ULIPs. Let us first understand what this means.

Exempt- Exempt- Exempt Tax Category

Tax-saving instruments belong to either of three categories

1. EEE (Exempt- Exempt- Exempt)

2. EET (Exempt- Exempt- Taxable)

3. ETE (Exempt- Taxable- Exempt)

ULIPs belong to the EEE category, which is generally applicable on long-term investments like EPF (Employee Provident Fund), PPF (Public Provident Fund), NPS (National Pension Scheme), etc.

a. The first exemption is upon the investment made in a ULIP. The part of your annual income invested in these instruments becomes tax-deductible.

b. The second exemption is upon the interest earned on the investment.

c. The third exemption is upon the income or the maturity amount of the investment when withdrawn.

d. The most important ULIP tax benefits that you can avail every year are deductions under Section 80C of the Income Tax Act.

New Regime for the Taxation of ULIP after Budget 2024

ULIPs have been some of the most tax efficient investment options in the country. When you look at the investment options available within a ULIP, this had been an unbeatable market investment option.

Tax benefits on invested amount and withdrawals from the plan meant that you could build wealth virtually tax-free. However, with the new tax amendments, even ULIPs have landed in the ambit of the taxman.

Here are the new taxation rules for ULIP which came to effect starting February, 2021.

1. ULIP Returns Can Be Taxable

Earlier, returns from ULIP were not taxed if your annual investment did not exceed 10% of the life cover in the plan. Now, if the premium that you pay towards ULIPS exceeds Rs 2.5 lakh, then the returns that you get will be taxed. The rate of tax will depend on your ULIPs composition.

The limit of Rs 2.5 lakhs applies to the combined premium of all the plans bought on or after 1st Feb, 2021. So, if you have started two ULIP investments after 1st Feb, and the total annual premium exceeds Rs 2.5 lakhs, both ULIPs will become taxable.

This will apply to the ULIPs that were purchased after 1St February 2021, the day government rolled out the year’s budget.

2. Restriction on Fund Switches

In most of the ULIPs, there is a feature of fund switches. This enables you to shift between funds if you think you can get better returns. These ‘switches’ were usually free. But now this may not be the case further. This is because ULIP can now be taxable.

2(a). The tax will be determined based on the duration you have held ULIP for

(i) Less than 3 years: Chargeable to the tax slab rate
(ii) More than 3 years: Chargeable @ 20%.

2(b). Tax will be determined on the type of funds held at the time of maturity under both section 112 and Section 112A.

3. Tax Rules Regarding Death Benefit

No changes are made in the tax rules regarding the death benefit that your nominee will receive after your death. The death benefit remains exempt from tax u/s 10(10)D of the Income Tax Act

How ULIP Taxation Works Now?

1. Taxation as Per your Funds

The taxes that you will pay on your ULIPs returns will depend on the funds chosen by you and the proportion selected.

a. If your funds’ equity component is more than 65 per cent, it will be taxed as an Equity mutual fund.

b. In the case of indirect equity investment, i.e., through ETF, the equity should be 90% to be taxed as an Equity mutual fund.

c. Equity fund investments enjoy long-term capital gains (LTCG) exemption up to Rs 1 lakh. Any amount above that will be subject to tax.

Section 112 and 112A cover the long-term capital gain tax. Here are the tax rates:

	Section	Rate
Profit arising from Units of Equity Oriented Funds	112A	10% (without indexation)
Profit arising from Units of Non-Equity Funds (Debt funds)	112	20% (without indexation)

What is Indexation?

Indexation is a method in which the purchase price of a commodity is adjusted to be in line with inflation. It helps in determining the actual gain or loss you incur on an investment. Cost Inflation Index (CII) is used to calculate the indexation. The government decides one year as the base and all the following years are assigned different values according to the inflation.

2. Tax Exemption Under Section 80C

The new tax amendments have not changed the deductions under Section 80C. You can still avail of deductions of up to Rs 1.5 lakhs towards the premium paid by you as per the rules under section 80C of the Income Tax Act. But the following conditions should be taken care of-

a. Section 80C includes deductions from the total of all the investments you own.
b. The premium you pay should be less than 10% of your sum assured if you have purchased ULIP after 1st April 2012

3. ULIP Tax Benefits Other than Section 80C

With the new tax rules regarding ULIPs that the government announced in 2024’s budget, there have been changes in maturity benefits.

If the premium paid by you in a year is less than Rs 2.5 lakh, the returns will be tax-free u/s 10(10)D. But in case the premium is higher than Rs 2.5 lakh in a year, will incur taxes.

Apart from the dual benefit of getting a life cover as well as investment opportunities, ULIPs provide you with tax benefits as well. But after the recent amendments, there have been some changes in taxation.

Changes after 2021’s budget have affected the maturity benefit as well. Let’s take a look at the maturity taxability of ULIP.

ULIP Maturity Taxability

1. ULIPs Starting Before 1st February 2021

a. The amount received on the maturity of your ULIP is free from tax as per section 10(10D) of the Income Tax Act, 1961.

b. This is applicable if the premium that you every year is less than 10% of the sum assured you will receive.

c. For the ULIPs that are purchased before April 2012, the rate is 20%.

2. ULIPs Starting On or After 1st February 2021

a. After the amendments that were made with the 2021 budget, the returns from your ULIP will be taxed if the premium paid by you in a year exceeds Rs 2.5 lakhs.

b. ULIP proceeds will now be charged as a Capital gain (whether long-term or short-term will be decided by the tenure)

c. If the amount of returns exceeds Rs 1 lakh the tax will be charged @10% in case of equity investments and 20% for others.

d. This is subject to the directions by the government

e. Death benefits remain tax-exempt

If you have purchased ULIP before February 1st, 2021, you will be able to take benefits that were there before the new taxation rules.

These will be applicable only if you purchase after February 1, 2021.

The EEE advantage, along with exemption from LTCG tax, coupled with various other benefits make ULIPs highly preferable, especially for first-time investors.

Invest 4G – A Unit Linked Insurance Plan

Canara HSBC Life Insurance Invest 4G is a lucrative ULIP, of which tax-saving is just one of the big advantages. It offers you a chance to secure your family against an eventuality and invest in financial goals like education and travel at the same time. With added benefits like Loyalty Additions, Wealth Boosters, and Return of Mortality Charge, it helps you maximize your income upon maturity.

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