ULIP Taxation

What is a ULIP?

A Unit Linked Insurance Plan (ULIP) is a life insurance plan that also helps you grow your money. When you buy a ULIP, you get life cover and a chance to invest your money in market-linked funds like equity or debt. This means if something happens to you, your family is financially safe. At the same time, the money you invest can grow over the years. You can pick how much risk you want to take based on your goals.

ULIP Tax Benefits

ULIPs offer tax* benefits under Sections 80C(incase of old tax regime) and 10(10D) of the Income Tax Act subject to certain conditions. This means you can save tax on premiums paid and enjoy tax-free maturity benefits, subject to conditions. Now that the basic understanding of ULIPs has been explained, let’s take a detailed look at the tax benefits they offer:

ULIP tax benefits on premiums paid

Section 80C of the Income Tax Act of 1961 offers considerable ULIP tax benefits in the form of deductions against ULIP premiums. Thus, the premium you may pay for your ULIP may be used to reduce your tax liability by up to Rs 1.5 lakhs if you have opted for old tax regime.

The major condition one may meet to be eligible for this tax benefit on their ULIP is to have their premium value not more than 10% of the death sum assured if the plan has been bought after 1st April 2012. If the policy has been issued before the given date, the premium may not be more than 20% of the death sum assured to be eligible.

ULIP tax benefits on maturity

When a ULIP matures, one may receive the maturity proceeds without having to pay any taxes on them, as per Section 10 (10D) of the Income Tax Act, 1961.

However, here as well, there may be some terms and conditions you may have to comply with, such as:

• The premium of the ULIP bought after 1st April 2012 may not be more than 10% of the death sum assured to be eligible for Section 10 (10D) ULIP tax exemption. The premium may not be more than 20% of the death sum assured if the policy has been bought before 1st April 2012.
• Furthermore, as per amendment prescribed under budget 2021, if the aggregate annual premium for policies purchased on or after 1st February 2021 is above Rs 2.5 lakhs (one or multiple polices put together) (High value ULIP’s), then the maturity proceeds may not be tax-exempted either.
• The long-term returns above Rs 1.25 lakhs would be taxed under LTCG at a 12.5% rate.

Tax benefit on the ULIP death benefit payout

If the policyholder were to pass away during the tenure of the ULIP, then the insurer may pay the death benefit payout to the beneficiaries/nominee/s of the policy. The nominees are eligible for the Section 10 (10D) tax benefit on a Unit Linked Insurance Plan or ULIP in the form of tax exemption on the death benefit payout, subject to the terms and conditions mentioned therein.

ULIP tax benefits of partial withdrawals

A ULIP has a lock-in period of five years within which one may not be able to make any withdrawals.

However, once the lock-in period ends, the policyholder may make partial withdrawals from their ULIP. These withdrawals may not be taxed if there is no gain; given that you may not withdraw more than 20% of the total corpus amount. However, note that for High value ULIP’s, if there is any gain on partial withdrawal such gain will be taxable as long term capital gain.

Tax Deductions on top-ups

When you increase the funds directed toward a ULIP through top-ups, you may also claim benefit under Section 80C on a top-up purchased on a policy like a ULIP. Top-up premiums may also come under the deduction purview of Section 80C and may help you reduce your tax outgo considerably. However, note that such deduction will be restricted up to 10% of top-up death sum assured and only under old tax regime.

ULIP tax benefits for the long term

Including a plan like a ULIP in your overall tax-benefits strategy may be a wise idea since it may be a long-term investment that provides long-term tax benefits. It may also pay off, in the long run, to invest in a ULIP in a disciplined manner. This may allow you to continue receiving life insurance coverage, grow potential returns, and receive tax benefits over a sustained period.

How does tax benefit in ULIPs work?

ULIPs can help you save money on taxes. The money you pay as a premium for your ULIP can be used to reduce your taxable income under Section 80C of the Income Tax Act under old tax regime. This means you may pay less tax. If you keep your ULIP for the full term and follow certain conditions, even the money you get at the end (maturity) may not be taxed. The death benefit given to your family is also tax-free.

Tax on ULIPs: Key Considerations

Tax Benefits of payment of ULIP premiums

You can claim a tax deduction of up to ₹1.5 lakh per year under Section 80C for the premiums you pay in case of old tax regime.

Tax implications on ULIP partial withdrawals

If you take out money from your ULIP before 5 years, the amount may be taxed. After 5 years, partial withdrawals are usually tax-free if they follow certain rules.

Taxation of ULIP maturity proceeds

If your ULIP premium is less than ₹2.5 lakh per year, the money you get at maturity is tax-free subject to satisfaction of Section 10(10D) conditions. But if your premium is more than ₹2.5 lakh per year for ULIPs bought after 1st Feb 2021, the returns would be taxed as capital gains. Gains above ₹1.25 lakh are taxed at 12.5%.

Tax Rule Update for High Value ULIPs Budget 2021

In Budget 2021, a new rule was introduced. If your ULIP premium is more than ₹2.5 lakh a year and the plan was bought after 1st Feb 2021, you may not get tax-free maturity. Also, if you have many ULIPs and their total premium crosses ₹2.5 lakh, the tax-free benefit is removed. You will have to pay capital gains tax on the returns you earn from such ULIPs.

How Will ULIPs Be Taxed After Budget 2025?

ULIPs will continue to enjoy tax benefits if the premium is below the limit and satisfy Section 10(10D) conditions. But for high-value ULIPs, the following will apply:

Premium Threshold for Exemption

If a yearly premium is below ₹2.5 lakh, maturity is tax-free subject to satisfaction of Section 10(10D) conditions.

Aggregation Rule

If you have many ULIPs, their combined premiums will be checked. If the total is more than ₹2.5 lakh, you lose the tax-free benefit.

Treatment of Non-Exempt ULIPs

If your ULIP is not exempt irrespective of premium amount, the returns will be taxed as capital gains.

Tax Rate

You will pay 12.5% tax on gains above ₹1.25 lakhs.

Key Features and Benefits of ULIPs

Though ULIP tax benefits are substantial, there may be many other features and benefits offered by the plan that may make it a suitable fit for many policyholders. Let’s look at them:

Life insurance coverage + investment opportunity –

With a ULIP, you may receive peace of mind from a life insurance policy mixed with the chance to earn returns based on market performance.

Fund switching –

A ULIP may allow you to switch your investments from debt to equity and vice versa based on your changing needs and risk appetite, as per policy terms & conditions.

Partial withdrawals –

With the partial withdrawal feature of a ULIP, you may be able to supplement your other sources of income and meet your short-term financial goals after completing the lock-in period of 5 years. Partial withdrawal in ULIPs is subject to terms & conditions of the policy.

Optional added protection –

You may add extra coverage to your ULIP by opting for riders, such as the critical illness rider, the waiver of premium rider, the accidental death or disability rider, and so on, on payment of additional nominal premium.

Tax Benefits

ULIPs offer tax-saving benefits on premiums under old tax regime, withdrawals (after lock-in), and maturity if the premium is within the limit

Fund options available under ULIPs

ULIPs offer many fund options for investment based on your goals and risk level. These include equity, debt, hybrid, and cash funds.

Equity Funds

These funds are invested mainly in equity shares of companies. They have high growth potential but also carry high risk. Suitable for long-term investors with high risk appetite.

Balanced or Hybrid Funds

These funds are invested in both equity and debt. They aim to give steady returns with less risk. Good for people who want balance.

Income, Fixed-Interest, And Bond Funds

These invest in safer options like government and corporate bonds. These give stable returns and are low-risk.

Cash Funds

Cash funds put money in short-term, low-risk market securities like certificate of deposit. These are good for people who want safe and quick access to money.

ULIP Taxation Rules and Implications

Premium Payment Tax Benefits

You can claim a deduction on premiums under Section 80C, up to ₹1.5 lakh per year in case of old tax regime. This is one of the key tax-saving advantages of ULIPs. As long as your annual premium is within the limits and your policy is active, you can enjoy this benefit every year. Remember, these deductions can significantly lower your taxable income.

Maturity Proceeds Taxability

The maturity amount you receive from a ULIP is tax-free if it follows specific tax rules. For example, if your annual premium is below ₹2.5 lakh and the policy was issued after February 1, 2021, the returns will not be taxed subject to satisfaction of Section 10(10D) conditions. However, if your premium is higher, the gains may be taxed as capital gains. In such cases, a 12.5% tax is charged on gains above ₹1.25 lakhs.

Death Benefit Tax Exemption

If the life assured passes away, the death benefit received by the nominee is completely tax-free under Section 10(10D) of the Income Tax Act. It doesn't matter what the premium amount was—the payout is fully exempt from tax, offering peace of mind to your family during difficult times.

Withdrawals/Surrender Tax Implications

If you withdraw money from your ULIP or surrender the policy before completing 5 years, the tax benefits you claimed earlier will be reversed. The withdrawn or surrendered amount will also be taxed as part of your income. But if you withdraw after 5 years and within the allowed limit, the money is tax-free, subject to policy conditions.

ULIP Tax Planning Strategies

Use these strategies to make the most of ULIP tax benefits.

Maximise The Benefits Available Under Section 80C

Pay your premiums on time and make sure your annual contribution adds up to ₹1.5 lakh. This helps you get the full deduction under Section 80C in case of old tax regime. It's a smart way to reduce your tax liability while ensuring you’re saving for the future.

Utilise The Tax-Free Maturity

To enjoy tax-free maturity, make sure your annual premium is below ₹2.5 lakh if the policy was bought after February 1, 2021. Keeping your policy active for the full term is also important. This will help you save on taxes and meet your financial goals without worry.

Use The Fund Switching Facility Wisely

ULIPs allow you to switch between equity, debt, or balanced funds without any tax impact. Use this option to adjust your investments as per market trends or changing life goals. This helps in maximising returns without paying extra tax.

Conclusion

To sum it up, a ULIP may be said to be a product that offers financial security for your loved ones and the prospect of creating long-term market-linked wealth. The tax benefit on a ULIP may be another addition to the existing benefits of ULIP. However, it may help you to know that tax benefits may be subject to amendments in tax laws.

To make the most of their ULIP, a policyholder can research the product thoroughly. Reaching out to a tax expert or a financial consultant may also help.

FAQs

1. Are ULIP premiums tax-deductible?

Yes, you can claim a deduction of up to ₹1.5 lakh per year on ULIP premiums under Section 80C of the Income Tax Act under old tax regime. This helps reduce your taxable income and save on taxes.

 

2. What are the tax implications if I surrender my ULIP policy?

If you surrender your ULIP before the 5-year lock-in period, the benefits claimed under Section 80C will be taken back and added to your income that year. The surrender amount is also taxable.

 

3. Is the maturity amount from ULIPs taxable?

If the annual premium is within limits (₹2.5 lakh), the maturity amount is tax-free subject to satisfaction of Section 10(10D) conditions. If the premium is higher or the ULIP doesn’t meet tax conditions, gains would be taxed as capital gains.

 

4. What is the lock-in period for ULIP?

ULIPs have a lock-in period of 5 years. During this time, you cannot make any partial withdrawals the policy without tax implications.

 

5. What is the switch option?

ULIPs allow you to switch between different fund types like equity ,debt , hybrid. This helps you manage your risk and investment better without any tax on switching.

 

6. What Is Net Asset Value?

Net Asset Value (NAV) is the price of a single unit of a ULIP fund. The NAV price is determined on a daily basis, based on the market price of assets supporting the fund and is a representation of what the market value is of your investment.

 

7. What can I do if I am not satisfied with a ULIP after purchase?

If you’re not happy with your ULIP, you can cancel it within the free-look period (usually 30 days). You’ll get back the premium after deducting applicable charges.

 

8. What are the Different Charges for ULIP?

ULIPs charge premium allocation, fund management, policy administration, mortality, and switching charges etc. Each insurer has its own amount for charges, which ultimately affects your returns.

 

9. What is the Benefit Payable to the Nominee in Case the Insured Passes Away?

In case of death, the nominee will get the higher of the sum assured or the fund value. This amount is tax-free under Section 10(10D) of the Income Tax Act.