In the union budget for 2021 announced earlier this year, the government declared that Unit Linked Insurance Plans (ULIPs) with insurance premiums exceeding  Rs. 2.5 Lakhs per annum would no longer be tax-free but would be taxed at maturity. Contrary to industry expectations,  the proposal has not dimmed investor enthusiasm for ULIPs but has rather generated greater interest in this investment scheme.

What are ULIPs?

Unit Linked Insurance Plans are schemes that offer investors the protection of an investment cover along with the growth benefits of equity investments. The plan does this by dividing the insurance premium paid by the investor into two parts one of which goes into providing insurance cover while the other is invested in securities, thereby giving investors the best of both worlds. Until now, returns from ULIPs were exempted from income tax under section 10 (10) D of the Income Tax Act 1961, thereby making ULIPs a very attractive option for investors, especially those in the high-income brackets.

ULIP vs ELSS

ULIPs are often compared to Equity Linked Savings Schemes (ELSS) for their wealth creation as well as tax savings potential. ELSS is a kind of mutual fund that invests in equities but which come with a mandatory lock-in period of 3 years. In the ULIP vs ELSS comparison, ELSS has the advantage of tax benefits, however, ULIPs come with the benefit of also providing the investor with insurance cover that ELSS does not provide. It also needs to be remembered that ULIPs still enjoy tax benefits of up to Rs. 1.5 Lakhs under section 80C which deals with tax breaks for insurance premiums.

Advantages of ULIPs

Despite the new taxation rules, ULIPs continue to enjoy the confidence of investors because of the following advantages:

  1.       Tax Incentives For Premiums Less than Rs. 2.5 Lakhs – The new rules only apply to ULIPs with annual premiums of more than Rs. 2.5 Lakhs. For those with premiums less than this amount, the tax breaks under section 10(10)D would continue as before. This includes a very large section of the Indian middle class whose monthly savings fall under the Rs. 20,000 mark.
  2.       Tax Incentives Under Section 80C – Since a ULIP is also an insurance scheme along with an equity fund, it is also eligible for tax incentives of up to Rs. 1.5 Lakhs under section 80C of the Income Tax Act.
  3.       Security of Insurance Cover – The primary advantage of ULIPs is that they provide investors with two benefits in a single package. You get an insurance policy, as well as an equity investment, rolled into one scheme.

The Bottom Line

ULIPs continue to remain popular despite the new taxation rules because of their inherent advantages of providing dual benefits to investors. Investing in ULIPs saves investors the hassle of buying insurance and making equity investments separately. With the additional benefit of tax incentives under section 80C, ULIP are not likely to be affected much by the new taxation rules announced in the union budget. In case you are interested in comparing the best ULIP plans available in India, you can use this handy table by Finserv MARKETS that lists the features and benefits of all the major ULIPs.

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