ULIP Taxation - Tax on ULIP Maturity - ULIP Tax benefits

ULIP benefits are many and varied. Right from giving you the dual benefits of insurance and investments to helping you take advantage of the power of compounding and earning market-linked ULIP returns, there are many reasons to invest in ULIPs. In addition to these advantages, there are also many ULIP tax benefits to look forward to.

To understand the tax-related ULIP benefits better, let us first take a closer look at how ULIPs work.

How do ULIPs work?

Unit Linked Insurance Plans offer policyholders the benefit a life cover in addition to the advantages of investments. Policyholders need to pay a premium to the insurer on a regular basis. The insurer offers coverage to the policyholder, so that in case of the latter’s unfortunate demise during the tenure of the plan, the nominee becomes eligible for the death benefits offered. That covers the insurance component.

As for the investment aspect, policyholders has option of multiple ULIP funds to invest when they purchase a Unit Linked Insurance Plan. The options available include equity funds or debt funds. At the time of maturity, the market-linked returns from these investments are paid out to the policyholder. These are the maturity benefits.

ULIP tax benefits

ULIP tax benefits can be leveraged in three areas, as follows –

1. Tax benefit on premiums:

Under section 80C of the Income Tax Act, 1961, the premiums that you pay for your ULIPs each financial year can be claimed as a deduction from your total income and deduction is restricted up to Rs. 1.5 lakh. If policy is not satisfying the Section 10(10D) conditions, amount of deduction under Section 80C is restricted up to 10% of capital sum assured for policies issued on or after April 1, 2012 and for policies issued before April 1, 2012 amount of deduction is restricted up to 20% of capital sum assured.

2. Tax benefits on maturity:

Section 10(10D) of the Income Tax Act, 1961, explains these benefits. Let’s take a closer look at the ULIP tax benefits on maturity.

ULIP tax benefits on maturity

Up until Budget 2021, the benefits on ULIP maturity were entirely tax-free subject to satisfaction of conditions as mentioned under Section 10(10D) of Income Tax Act, 1961. Therefore, now that we are on the other side of the budget for FY22, the taxability of the benefits on the maturity of ULIPs can be divided into two key categories –

• Taxability for ULIPs issued before February 1, 2021
• Taxability for ULIPs issued on or after February 1, 2021

ULIPs issued before February 1, 2021

As per section 10(10D) of the Income Tax Act, 1961, the ULIP returns on maturity are tax-free. This is applicable only if the annual premium is less than 10% of the capital sum assured for the plans purchased after April 1, 2012 (for the plans purchased before the said date, it is 20%).

This makes ULIPs issued before February 1, 2021 EEE tax-saving instruments.

ULIPs issued on or after February 1, 2021

In the budget for the FY 2021-22, it was announced that for ULIPs issued on or after February 1, 2021, if the aggregate premium exceeds Rs. 2.50 lakhs in any financial year during tenure of the policy, the proceeds from the plan shall now be taxed as capital gain at the time of payments under policy. The exception to this would be any amount received by the nominee at the time of death of the policyholder, which would not be taxable. It may be noted that top up premium would also be considered for determining annual premium. Death proceeds will be taxable for the keyman policy (Employer employee policy).

Additionally, long term capital gains calculated on the proceeds of ULIPs issued on or after February 1, 2021, exceeding Rs. 1 lakh, shall also be taxable at the rate of 10%. Note that this is applicable under the assumption that all ULIPs will be treated as equity oriented funds. However further clarity is awaited from the Govt.

Conclusion

Therefore, if you already have an existing ULIP, you can avail all the tax benefits that were existing before the Budget 2021 amendments. If you purchased a ULIP on or after February 1, 2021, you can still make use of the ULIP tax benefits on the ULIP returns, subject to the amendments made.

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