Tax
2024-05-14 5 Min read
0
Explore advanced tax planning techniques for high-net-worth individuals, including tax optimisation, succession planning, and wealth preservation through ULIPs, especially with tax-free switches from debt to equity and vice versa, which is not available in any other product. SUD e-Wealth Royale has twelve free switches per policy year.
As India treads forward on its path towards economic growth and social development, the taxation of high net-worth individuals (HNIs) has become a crucial subject for discussion. And why not? From 12,069 individuals having a net worth of over USD 30 million in 2022, the number of HNIs is expected to cross 19,119 in just the next 5 years1.
Strategising taxes has been a crucial financial management skill, particularly among high-net-worth individuals (HNIs) in India. Budget 2019 introduced a significant 22% surge in surcharge rates for individuals earning a taxable income exceeding INR 5 crore2, resulting in an elevated effective tax rate reaching up to 42.74%. This intricate tax structure and evolving rules have further underlined the vital importance of effective tax planning. HNIs can minimise tax burdens and maximise wealth creation by astutely managing their finances through strategic planning.
When you wish to invest in a tax-saving instrument that is designed specifically to offer tax benefits, then ULIPs can surely be considered. ULIPs, unit-linked insurance plans, stand out as a superior choice for long-term returns and tax efficiency. Opting for Unit Linked Insurance Plans (ULIPs) can offer investors several tax advantages. This life insurance plan not only facilitates savings but also combines investment and insurance components, providing investors with multiple tax benefits.
Tax Efficiency in ULIPs
Let us explore how ULIPs prove to be an advanced tax planning technique for high-net-worth individuals.
1.Deductible premium
The premium that you pay towards the ULIP insurance is divided into 2 parts. One part goes to offer your life coverage, while the other is towards the investment. The ULIP policy offers you the flexibility to invest in investment funds as per your financial requirements and your risk-taking capacity. Whether you choose debt funds, equities, or a combination of both, you can get a deduction of up to INR 1.5 lakhs a year.
The only condition here is that the premium that you pay in a year should be lower than 10% of the sum insured. Let’s understand this with an example. Suppose, for a policy, the sum assured is INR 15 lakhs, while the premium paid is INR 1.5 lakhs. Here, the entire sum can be claimed as a deduction under section 80C. On the contrary, if the premium for the same sum assured is INR 2 lakhs, then the deduction is limited to 10%, equalling INR 1.5 lakhs3.
2.Tax-free switches
Your ULIP allows you an array of funds to choose from. Whether you choose to put all your money in one fund or distribute it into various funds. If you feel the funds are not performing as per your expectations, you can switch between them. While there is no limit to how many times you can switch, keep in mind that after a certain number of switches in a year, you’ll be charged.
For example, SUD Life e-Wealth Royale allows you as many as 12 free switches in a policy year. In case you want, you have the option of going for more switches, with a nominal charge of INR ₹100 per switch.
The bigger advantage here is that no matter how many switches you make, there is no tax implication, even if there’s a capital gain. Unlike many other financial products where switching is treated as redemption and reinvestment, resulting in taxable capital gains, in ULIPs, there is no such worry5. Therefore, as an HNI, this can be a very lucrative option for you.
3.Free partial withdrawals
ULIPs come with a 5-year lock-in period. Once this period is over, you can make a partial withdrawal in case you are facing a financial crunch. In the SUD Life e-Wealth Royale ULIP insurance plan, up to 4 partial withdrawals are totally free in a year, after which you are charged ₹100 per partial withdrawal4.
4.Tax benefits on payouts
Let us how you can get tax benefits on the ULIP policy payout.
a.Maturity benefit
Budget 2021, introduced certain changes in the taxability of ULIPs. Look at the table to understand these changes:
As per Budget 2021, capital gains from ULIPs at the time of maturity or surrender would be taxable in accordance with the norms of capital gains taxation, wherein any amount more than Rs 1 lakh would be taxed at 10%.
Even if your premium is more than INR 2.5 lakhs, you just need to keep your post-tax returns in mind and then choose the best type of investment as per your risk appetite, asset allocation and risk profile.
b.Death benefit
The death benefit remains completely tax-free in the hands of the nominee.
1.Deductible premium
The premium that you pay towards the ULIP insurance is divided into 2 parts. One part goes to offer your life coverage, while the other is towards the investment. The ULIP policy offers you the flexibility to invest in investment funds as per your financial requirements and your risk-taking capacity. Whether you choose debt funds, equities, or a combination of both, you can get a deduction of up to INR 1.5 lakhs a year.
The only condition here is that the premium that you pay in a year should be lower than 10% of the sum insured. Let’s understand this with an example. Suppose, for a policy, the sum assured is INR 15 lakhs, while the premium paid is INR 1.5 lakhs. Here, the entire sum can be claimed as a deduction under section 80C. On the contrary, if the premium for the same sum assured is INR 2 lakhs, then the deduction is limited to 10%, equalling INR 1.5 lakhs3.
2.Tax-free switches
Your ULIP allows you an array of funds to choose from. Whether you choose to put all your money in one fund or distribute it into various funds. If you feel the funds are not performing as per your expectations, you can switch between them. While there is no limit to how many times you can switch, keep in mind that after a certain number of switches in a year, you’ll be charged.
For example, SUD Life e-Wealth Royale allows you as many as 12 free switches in a policy year. In case you want, you have the option of going for more switches, with a nominal charge of INR ₹100 per switch.
The bigger advantage here is that no matter how many switches you make, there is no tax implication, even if there’s a capital gain. Unlike many other financial products where switching is treated as redemption and reinvestment, resulting in taxable capital gains, in ULIPs, there is no such worry5. Therefore, as an HNI, this can be a very lucrative option for you.
3.Free partial withdrawals
ULIPs come with a 5-year lock-in period. Once this period is over, you can make a partial withdrawal in case you are facing a financial crunch. In the SUD Life e-Wealth Royale ULIP insurance plan, up to 4 partial withdrawals are totally free in a year, after which you are charged ₹100 per partial withdrawal4.
4.Tax benefits on payouts
Let us how you can get tax benefits on the ULIP policy payout.
a.Maturity benefit
Budget 2021, introduced certain changes in the taxability of ULIPs. Look at the table to understand these changes:
| ULIPs purchased | Taxability of ULIP Maturity Benefit under Section 10(10D) |
|---|---|
| Before February 1, 2021 | The payout will remain tax-free if the premium paid in a policy year is up to 10% of the sum assured |
| On or after February 1, 2021 | The payout will be tax-free if in case the premium paid for all the ULIPs under your name is less than INR 2.5 lakhs. In case the premium is more than INR 2.5 lakhs, the payout will be regarded as your income. It will then be taxable as per the slab rate that you fall into. |
As per Budget 2021, capital gains from ULIPs at the time of maturity or surrender would be taxable in accordance with the norms of capital gains taxation, wherein any amount more than Rs 1 lakh would be taxed at 10%.
Even if your premium is more than INR 2.5 lakhs, you just need to keep your post-tax returns in mind and then choose the best type of investment as per your risk appetite, asset allocation and risk profile.
b.Death benefit
The death benefit remains completely tax-free in the hands of the nominee.
Conclusion
The complex legal frameworks and changing policies surrounding HNI taxation in India create a complex landscape that requires exploration and comprehension. If you fall in the category of HNIs, we recommend you seek expertise from financial advisors and tax professionals to customise tax strategies according to your unique situations and ensure adherence to relevant laws. Through meticulous planning and proactive tax management, you can not only safeguard assets but also maintain wealth and accomplish your financial objectives in India.
As an investor who falls in the HNI category, you can benefit greatly from the flexibility provided by ULIPs. The feature of fund switching allows adjustments in response to market dynamics or your changing financial situations. When the equity market performs well, switching from debt to equity within ULIPs can help you improve your returns. Careful monitoring of your portfolio can be helpful in building a suitable corpus gradually over time.
As an investor who falls in the HNI category, you can benefit greatly from the flexibility provided by ULIPs. The feature of fund switching allows adjustments in response to market dynamics or your changing financial situations. When the equity market performs well, switching from debt to equity within ULIPs can help you improve your returns. Careful monitoring of your portfolio can be helpful in building a suitable corpus gradually over time.
Reference
1. https://indianexpress.com/article/business/economy/india-ultra-high-net-worth-individuals-billionaires-report-8614499/
2.https://economictimes.indiatimes.com/wealth/tax/highest-surcharge-on-personal-income-tax-reduced-from-37-to-25/articleshow/97517843.cms
3.https://economictimes.indiatimes.com/wealth/insure/why-ulips-are-one-of-the-best-tax-saving-instruments/tomorrowmakersshow/50865553.cms
4.https://www.sudlife.in/Products/SUDLife_e-Wealth_Royale_Brochure.pdf
5.https://cleartax.in/s/unit-link-insurance-plan-ulip
Reference: SUD Life e-Wealth Royale (UIN: 142L082V01)
2.https://economictimes.indiatimes.com/wealth/tax/highest-surcharge-on-personal-income-tax-reduced-from-37-to-25/articleshow/97517843.cms
3.https://economictimes.indiatimes.com/wealth/insure/why-ulips-are-one-of-the-best-tax-saving-instruments/tomorrowmakersshow/50865553.cms
4.https://www.sudlife.in/Products/SUDLife_e-Wealth_Royale_Brochure.pdf
5.https://cleartax.in/s/unit-link-insurance-plan-ulip
Reference: SUD Life e-Wealth Royale (UIN: 142L082V01)
Disclaimer
Every additional switch will be charged ` 100/- per switch. This charge will be recovered by cancellation of appropriate number of units. Unused switches cannot be carried forward to future policy year(s).
Partial withdrawal are not allowed during the first 5 policy year or in case life assured is minor. It is allowed from 6th policy year or when life assured attains age 18 whichever is later. Partial Withdrawals will not be allowed which would result into termination of policy.
Unit Linked Life Insurance Products are different from the traditional insurance products and are subject to risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. The policyholder can withdraw the invested amount only after the completion of five plan years. Star Union Dai-ichi Life Insurance Company is the name of the Insurance Company and SUD Life SUD Life e-Wealth Royale is only the name of the unit linked life insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their prospects and returns.
SUD Life SUD Life e-Wealth Royale | UIN: 142L082V02 | A Unit–Linked Non-Participating Individual Life Insurance Plan Star Union Dai-ichi Life Insurance Company Limited | IRDAI Regn. No: 142 | CIN: U66010MH2007PLC174472
Registered Office: 11th Floor, Vishwaroop I.T. Park, Plot No. 34, 35 & 38, Sector 30A of IIP, Vashi, Navi Mumbai – 400 703 | Contact No: +91 22 7196 6200 | 1800 266 8833 (Toll Free) | Timing: 9:00 am – 7:00 pm (Mon – Sat)| Email ID: customercare@sudlife.in | Visit: www.sudlife.in | For more details on risk factors, terms and conditions, please refer to the sales brochure carefully, before concluding the sale. |Trade-logo displayed belongs to M/s Bank of India, M/s Union Bank of India and M/s Dai-ichi Life International Holdings LLC and are being used by Star Union Dai-ichi Life Insurance Co. Ltd. under license.
Partial withdrawal are not allowed during the first 5 policy year or in case life assured is minor. It is allowed from 6th policy year or when life assured attains age 18 whichever is later. Partial Withdrawals will not be allowed which would result into termination of policy.
Unit Linked Life Insurance Products are different from the traditional insurance products and are subject to risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. The policyholder can withdraw the invested amount only after the completion of five plan years. Star Union Dai-ichi Life Insurance Company is the name of the Insurance Company and SUD Life SUD Life e-Wealth Royale is only the name of the unit linked life insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their prospects and returns.
SUD Life SUD Life e-Wealth Royale | UIN: 142L082V02 | A Unit–Linked Non-Participating Individual Life Insurance Plan Star Union Dai-ichi Life Insurance Company Limited | IRDAI Regn. No: 142 | CIN: U66010MH2007PLC174472
Registered Office: 11th Floor, Vishwaroop I.T. Park, Plot No. 34, 35 & 38, Sector 30A of IIP, Vashi, Navi Mumbai – 400 703 | Contact No: +91 22 7196 6200 | 1800 266 8833 (Toll Free) | Timing: 9:00 am – 7:00 pm (Mon – Sat)| Email ID: customercare@sudlife.in | Visit: www.sudlife.in | For more details on risk factors, terms and conditions, please refer to the sales brochure carefully, before concluding the sale. |Trade-logo displayed belongs to M/s Bank of India, M/s Union Bank of India and M/s Dai-ichi Life International Holdings LLC and are being used by Star Union Dai-ichi Life Insurance Co. Ltd. under license.
Beware of spurious or fraud phone calls
IRDAI is not involved in activities like selling insurance policies, announcing bonus or investment of premiums. Public receiving such phone calls are requested to lodge a police complaint.
Disclaimer
Star Union Dai-ichi Life Insurance Company Limited IRDAI Regn. No: 142 | CIN: U66010MH2007PLC174472
Registered Office: 11th Floor, Vishwaroop I.T. Park, Plot No. 34, 35 & 38, Sector 30A of IIP, Vashi, Navi Mumbai – 400 703 | Contact No: +91 22 7196 6200 | 1800 266 8833 (Toll Free) | Timing: 9:00 am – 7:00 pm (Mon – Sat)| Email ID: customercare@sudlife.in | Visit: www.sudlife.in | For more details on risk factors, terms and conditions, please refer to the sales brochure carefully, before concluding the sale. |Trade-logo displayed belongs to M/s Bank of India, M/s Union Bank of India and M/s Dai-ichi Life International Holdings LLC and are being used by Star Union Dai-ichi Life Insurance Co. Ltd. under license.
Registered Office: 11th Floor, Vishwaroop I.T. Park, Plot No. 34, 35 & 38, Sector 30A of IIP, Vashi, Navi Mumbai – 400 703 | Contact No: +91 22 7196 6200 | 1800 266 8833 (Toll Free) | Timing: 9:00 am – 7:00 pm (Mon – Sat)| Email ID: customercare@sudlife.in | Visit: www.sudlife.in | For more details on risk factors, terms and conditions, please refer to the sales brochure carefully, before concluding the sale. |Trade-logo displayed belongs to M/s Bank of India, M/s Union Bank of India and M/s Dai-ichi Life International Holdings LLC and are being used by Star Union Dai-ichi Life Insurance Co. Ltd. under license.
Beware of spurious or fraud phone calls
IRDAI is not involved in activities like selling insurance policies, announcing bonus or investment of premiums. Public receiving such phone calls are requested to lodge a police complaint.
