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Tax Implications On ULIP Maturity Benefit Payouts


March 06, 2020

By : Bajaj Allianz Life

One of the prime reasons for investing in a Unit Linked Insurance Plan (ULIP) is to achieve your life goals. Moreover, in case of death of the policyholder, the nominees receive a death benefit thereby securing the financial goals of their loved ones even in their absence. However, if the policyholder survives the policy, he gets the maturity benefits. Moreover, you can claim deduction up to Rs. 1,50,000 on taxable income under Section 80C of the Income Tax Act, 1961, subject to provisions stated therein.

Before purchasing ULIPs, it is essential to understand the functioning of the policy. Moreover, one must understand the tax-saving benefits applicable to the plan. Hence, go through the following guide about ULIP to understand the various ULIP tax benefits:

What is ULIP and its tax benefits?

A ULIP policy is a combination of investment and insurance. The dual benefits of the ULIP policy bring the policyholders a step closer to accomplish their life goals. A policyholder can not only secure his family but also get the benefit of market linked returns. Investor has choice of various ULIP funds to decide their asset allocation, and can invest as per their risk profile and investment horizon. Another tax advantage of new-age ULIPs is that investors can do multiple switches without any transaction costs, and there is no capital gains tax implication as well. This allows investors to plan their asset allocation over the policy term in a tax-efficient manner.

Under a ULIP Policy, a policyholder gets an opportunity to save taxes as well. ULIPs offer tax savings benefits on two main elements. Take a look:

1. Premium - According to Section 80C of the Income Tax Act, 1961, the premiums can be claimed as a deduction from your taxable income. As per this section, investments up to Rs. 1.5 lakh can be claimed as deductions, subject to provisions stated therein.

2. Maturity benefit - The amount received on the maturity date is tax-free as stated under Section 10(10D) of the Income Tax Act, 1961 subject to policy terms and conditions.

While tax-savings are applicable to every ULIP Policy, everyone must know the difference between the benefits offered on ULIPs purchased before and after 1st April 2012. Go through the distinctions between the two mentioned below:

1. ULIP policy purchased before 1st April 2012

a. If the annual premium is less than 20% of the sum assured, deductions can be availed for premium amount paid.

b. If the annual premium is more than 20% of the sum assured, deduction is limited to an amount equal to the 20% of the sum assured.

2. ULIP policy purchased after 1st April 2012

a. If the annual premium is less than 10% of the sum assured, deduction can be availed for premium amount paid.

b. If the annual premium is more than 10% of the sum assured, deduction is limited to an amount equal to the 10% of the sum assured.

What are the tax benefits on maturity pay-outs?

When you invest in ULIP policies, you receive the fund value on the maturity date. The fund value is the value of your investments that may have grown over the policy term. The pay-out which a policyholder obtains is known as the maturity benefit. These maturity benefits are tax-free under Section 10(10D) of Income Tax Act 1961, subject to provisions stated therein. However, the policyholder must fulfil the following conditions to avail these tax benefits:

1. For ULIPs purchased before 1st April 2012 - if the premium is more than 20% of the sum assured value, the deduction is allowed on the amount, which is equal to 20% of the sum assured.

2. For ULIPs purchased after 1st April 2012 - if the premium is more than 10% of the sum assured amount, the deduction is allowed on the amount, which is equal to 10% of the sum assured.

3. If the premium is more than specified limit, on maturity, income from policy must be added to taxable income of policyholder in the year of receipt of maturity proceeds. This amount will be taxable at the applicable rate to the policyholder.

What are the conditions every policyholder should fulfil to avail the tax benefits?

1. Pay the premiums on a timely basis without fail.

2. Do not surrender the ULIP Policy before its lock-in period of 5 years.

To sum up, a ULIP Policy can help you get your financial goals and life goals done if you plan your investment wisely. However, you should evaluate the validity and accuracy of facts along with law in line with the prevailing tax statutes. Moreover, you should also seek help from tax professionals for better clarity and understanding.

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~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

**Past performance is not indicative of future performance.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.