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Renewal of existing ULIP remains a sound financial decision? Find out

The Financial Express logo The Financial Express 30-04-2021 Priyadarshini Maji
In the recent budgetary proposal of removal of tax exemption on ULIPs maturity proceeds, various experts have been saying that continued investment through renewals in ULIPs remains a sound financial decision. © Provided by The Financial Express In the recent budgetary proposal of removal of tax exemption on ULIPs maturity proceeds, various experts have been saying that continued investment through renewals in ULIPs remains a sound financial decision.

Unit Linked Insurance Policies or ULIPs are a comprehensive financial tool that offers customers an element of protection from unforeseen circumstances and doubles as an investment product that provides flexibility to grow their wealth based on market conditions.

In the recent budgetary proposal of removal of tax exemption on ULIPs maturity proceeds, various experts have been saying that continued investment through renewals in ULIPs remains a sound financial decision.

Prashant Tripathy, Managing Director and Chief Executive Officer, Max Life Insurance says, "In the recent Union Budget, the Government has announced that the maturity proceeds of ULIPs with an annual aggregate premium of above Rs 2.5 lakh in any financial year will be liable for capital gains tax."

He further adds, "However, the budgetary proposal is only applicable for ULIPs issued after January 31st, 2021. Hence, this does not affect the performance or reduce the importance of the product for policyholders who purchased it before February 1st, 2021, making ULIP an attractive investment plus protection tool to continue to remain invested in."

What are some of the benefits of continuing existing policies (issued before 1st Feb' 21)? 

Industry experts say, whether customers purchase a new ULIP or decide to renew their existing policy, most will reap the dual benefits of growing their wealth and protecting the future of their families.

Apart from that, Tripathy says "policyholders who have purchased ULIPs before February 1st, 2021 can avail of multiple benefits from renewing their existing policies. For instance, the premium paid on the product continues to enjoy the section 80C deduction benefit up to Rs 1.5 lakh per annum, which is available for new ULIP as well."

Further, if the annual premium remains below Rs 2.5 lakh, policyholders will continue securing tax-free returns under section 10(10D). Additionally, the proceeds received on death benefit are also exempt from tax.

Under section 194DA, income proceeds are exempt from TDS, and policyholders do not have to pay security transaction tax (STT) on redemption of such ULIPs.

Tripathy adds, "By continuing investing in ULIP, one remains financially protected apart from having a steady growth of Investment over time." Additionally, it also helps protect wealth by offering the flexibility to change the chosen investment funds based on market conditions.

What will be the implications on policyholders who continue with their ULIP policy?

Experts say, policyholders who have purchased ULIP before February 1st, 2021 will not face any implications on their plans and are free to enjoy the existing tax benefits even upon renewal of existing policies. The changes announced during the Union Budget are only applicable for customers who have purchased or plan to purchase a new policy after January 31st, 2021.

Tripathy says, "In case, new ULIPs are purchased with an aggregate annual premium higher than Rs 2.5 lakh in any financial year, the returns will no longer be tax-exempt." However, both ULIP policyholders who pay premiums above and below Rs 2.5 lakh can avail of tax-free returns on death benefits subject to conditions mentioned under section 10(10D).

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