Budget 2020 was focused mainly on introducing new initiatives, which can influence the economic growth of India. The introduction of the new tax regime is one of the most significant developments in Budget 2020. This new tax structurechanges the way you have been paying your taxes all these years. Here, we describethe new system and how it affects the Unit-Linked Insurance Plan (ULIP) policyholders.
Comparing the tax regimes
Below is a comparison between the old and new tax regimes.
|Income||Old regime||New regime|
|Till INR 2.5 lakh||Exempt||Exempt|
|INR 2.5 lakh – INR 5 lakh||5%||5%|
|INR 5 lakh – INR 7.5 lakh||20%||10%|
|INR 7.5 lakh – INR 10 lakh||20%||15%|
|INR 10 lakh – INR 12.5 lakh||30%||20%|
|INR 12.5 lakh – INR 15 lakh||30%||25%|
|INR 15 lakh or more||30%||30%|
While paying your taxes, you will now have the option to choose betweenthe old and new tax regimes. You may think that the new regime is more favorable due to the lower taxation. However, it comes with one drawback;many income tax deductions and exemptions, which you could previously avail of under Section 80D and 80C of the Income Tax Act, 1961, are not permissible with the new tax regime. The good news is that you can still get these benefits with the old regime. Hence, be careful in determining which taxation system is more beneficial for you.
After the Budget 2020 announcement, many tax-saving investment instruments do not seem as lucrative as earlier. However, some of them still can benefit you, including ULIP policy, which has now emerged as an all-round winner.
How ULIPs have become more advantageous now
If you are wondering what is ULIP plan, let us first explain it before elaborating on its tax-saving benefits.
A ULIP is an investment instrument, which also works as a life insurance policy. To purchase a ULIP, you have to pay regular premiums, which your insurer divides between various investment funds, like equity and debt. Over a long period, your investment grows into a respectable fortune. A ULIP policy comes with many advantages, like fund-switching, partial withdrawal, tax benefits, and more.
Section 80C of the Income Tax Act, 1961 allows a yearly tax deduction of up to INR 1.5 lakh on the premium paid as per the old tax regime. This benefit has made ULIP a popular investment option. Even under the new tax regime, ULIP policyholders can get certain tax deductions.
ULIPs still offer tax exemption on Long-Term Capital Gains(LTCG) under the new taxation rules. This means your ULIP’s maturity benefits will be tax-free even if you choose the new regime. Additionally, the fund-switching option of the ULIP does not attract any tax. Hence, you can switch between the top-performing ULIP funds in equity and debt-based markets without worrying about paying taxes and creating substantial wealth. With these benefits, you can secure a financial future for yourself and your loved ones.
How to choose the best ULIP in India
Before selecting a ULIP, you must:
- Make sure that it offers you the option to choose from equity, debt, and balanced funds
- Ensure that you opt for a sufficient life cover
- Make sure to keep your money invested for a long period
- Find out about any additional fees charged by the insurer
- Research on all the additional benefits
- Make sure that the plan has a premium top-up option
- Check if the fund-switching benefit is available with the ULIP
- Find out the partial withdrawal limits of the plan
The top-performing ULIP fundscan help you earn high returns on investment.However, you need to ensure that the ULIP matches these criteria. Moreover, make sure to buy the policy from a trusted insurer so that you get the best services.