Investing in Unit Linked Plans (ULIPs) has taken a sharp turn towards uncertainty after the latest budget 2021 announcements. The ULIP is known as one of the most common instruments of investment which makes invested sum delightfully tax-free.
The ULIPs have always been an attractive investment option for individuals in the higher income brackets as it gives one of the best tax benefits under the Section 10(10D) of Income Tax Act of India. In addition to this, one can do equity investments in the ULIPs, which is also one of the most popular investment instruments.
How has the latest taxation regime changed the face of ULIP investment?
From Budget 2021 onwards, investment in ULIP will not be tax-free if the premium of a year is more than the set limit of INR 2.5 lakh, i.e., the tax exemption is only available till the 2.5 lakh investment in Section 10(10)D.
However, there is a catch in this provision. It mentions that the INR 2.5 lakh limit is only applicable on the ULIP premium policies which have been taken on or after the 1st February 2021, as per the prevailing rules.
Therefore, the tension may subside for the individuals who have the older or existing ULIPs going on, taken before the threshold date. In addition to this, multiple policies premium will also average at INR 2.5 lakh limit and thus will not result in any tax exemption.
What will be the tax treatment to ULIP premium over Rs 2.5 lakh limit?
I this case, we will question the basic treatment of ULIPs premium crossing the set limit of INR 2.5 lakh and now what would be the next step in this debt investment in the ULIPs.
If we go by the experts' advice, who themselves are just guessing over the situation, have mentioned that the debt fund or the ULIPs investment part is now at par with the equity mutual funds.
As per section 112A and a definition within it "Equity-Oriented Fund '' has been amendment proposed in the 2021 finance bill, which now proposes to cover the ULIPs does not have any applicability of the 4th and 5th provison.
Therefore, to understand it more clearly, the Long Term Capital Gains (LTCG), which crosses the limit of INR 1 lakh are eligible for the 10 percent tax rate, sans indexation as per section 112A. On the other hand, if it is the Short Term Capital Gain (STCG), it must be levied with the 15 percent tax rate and that too on the overall amount.
What if an individual change from debt to equity in the ULIP?
Here, the financial experts have opined that there would be no additional tax applicability, even if the individual switches from the debt to equity or even vice-versa. However, it will be applicable only if the redemption or the maturity of ULIPs units are section 10(10)D exempted.
Are there any alternatives for long term capital gains tax savings On ULIPs?
If any individual wishes to get long term capital gains of INR 1 lakh yearly upper limit, he can try buying or selling equity mutual funds. However, there is no such benefit in the ULIPs. Still, a person can get redemption in tax exemption after the initial five years of the lock-in period.
Online ULIPs are gaining attraction
Earlier, the ULIPs did not have a great reputation as numerous miscellaneous sellers would offer undesired and unscrupulous deals to the investors. This was coupled with exorbitantly high charges in every sale and transaction. However, due to the online portfolio of ULIPs, the times have changed and the fraudulent practices have come to an end.
The online ULIPs are now much more secure, cost-effective and according to the actual requirements of the consumers. At the same time, the charges are also competitive, reasonable and justified.
The final say on the buying decision of ULIP
If we go by the suggestion of a thorough financial expert, it is much more worthwhile to opt for the combo of Equity Mutual Funds (MFs) and the term insurance, and then the ULIPs.
When looked at from the perspective of liquidity, the ULIPs are also at a disadvantage, as compared with the mutual funds. Moreover, the switching within the policy does not have any tax applicability or complex exit. The factors such as 5 years mandatory lock-in and contributions, extra lengthy tenure to sustain, non-transparent framework are all against the ULIP regime.
(Abour the author: Amit Gupta, the author of this article is the Managing Director of SAG Infotech)