The government recently made changes to Unit Linked Insurance Plan (ULIP) tax structure. While announcing Union Budget 2021-22, the government said the maturity proceeds from ULIP with an annual premium of more than Rs 2.5 lakh would no more be tax-free for plans taken on or after February 1, 2021.

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In other words, the ULIP would be treated as a capital asset and capital gain taxability would apply as in the case of equity oriented mutual funds.

However, as per the announcements, the amount received on the insured's demise will be exempted from tax.

ULIP, as we know, is a life insurance product that offers risk cover for the insured together with investment options. In this, a part of the money is invested in stocks, bonds and similar assets, while the remaining part provides the insured with a life cover.

Compared to other endowment plans, ULIPs have always been considered more transparent in terms of how the money is being invested and what charges are being deducted.

Over the years, they have emerged as a popular investment option for individuals who were looking at purchasing an insurance policy that provided the added benefit of investment.

However, after the recent announcement, Naval Goel, CEO & founder of PolicyX believes that ULIPs will lose its competitive advantage that they enjoyed over other short-term investment vehicles.

"It will affect the sales of ULIPs. With the same, people will focus more on having protection first like investing in insurance and later will go for investment products,” he stresses.

Rakesh Goyal, director of Probus Insurance also believes the same and adds that this step is taken to align with the other investment products and promote protection goals rather than investment goals.

"This move would not be happily welcomed by many high-net individuals who invest in ULIPs with the primary reason of tax exemption on the maturity and look it more as an investment option by paying higher premiums. The sheen of this plan would slide down amongst these high-net individuals as this amendment would majorly defeat the intent of them investing in ULIPs, and an impact on the sales of this plan could be observed in the near future," Goyal opines.

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(Edited by : Jomy)