admin 
Unit-linked insurance plans (ULIPs) are now deemed taxable after a certain point. The government announced major changes in Budget 2021 concerning unit-linked insurance plans (ULIP). Are you new to the insurance market and wondering what is ULIP? ULIP is a type of life insurance plan in which a part of your premium is invested in funds you choose, and the other part of the premium is used to buy life insurance cover.
For ULIPs that are purchased after 1st February 2021, whose premium amount is beyond ₹2.5 lakhs per annum, the maturity amount will now become taxable. Previously, this amount was tax-free. Hence, this is a big blow for HNIs who have invested huge amounts in ULIPs. However, for the maturity amount of ULIPs with an amount of premium less than 2.5 Lakhs per annum, payout during the demise of the policyholder is tax-free.
This change by the government has made it even and fair for all. Unit-linked insurance plans don’t offer any tax arbitrage anymore. Hence, it has become fair between the taxing of ULIPs and mutual funds. However, this move in the budget will now impact high net worth individuals who preferred ULIPs with high premiums. What can HNIs do now who have invested heavily in ULIPs? Let’s get to know more in detail.
Higher Premiums Are Now Taxed
Earlier, it was permissible exclusively for HNIs to invest ultra-high annual premiums for ULIPs. Thanks to the tax-free nature of the maturity amount, HNIs loved investing in ULIPs after the introduction of the long-term capital gains (LTCG) tax on equity investments in 2018.
Thus, unit-linked insurance plans were a great option to invest in equity markets and get tax exemption on returns. But now that ULIPs after a certain annual premium are taxable, they are no longer attractive for HNIs.
One more benefit that ULIPs gave investors was that they were a hybrid product that would allow investors to segregate funds into various equity and debt schemes. Before the major rule changes, investors could easily switch between debt and equity funds without caring about tax additions. But this has now changed, and it isn’t applicable anymore.
What can HNIs do now?
Be it an HNI or general audience, it is best to keep things easy and uncluttered. Opting for straightforward mutual funds for investments is the best option. You can always change your mutual funds without any doubt or hassles if their performance isn’t satisfactory.
Treat ULIPs as a life cover option rather than an investment option. If you only choose ULIPs for both life cover and investment options, then you will be stuck with one scheme for your entire tenure. Do note that the expenses of equity funds are way lesser than ULIP’s charges like allocation of premiums, mortality and administration charges. With the overall changes to the tax structure, HNIs need to come up with a new strategy for both insurance and investment and make wise decisions.
