ULIP Taxation Explained

ULIPs combine the benefits of life insurance and investment so that you can secure financial protection for your loved ones and earn lucrative returns. In addition to these primary benefits, policyholders also prefer these plans for ULIP taxation advantages. While premiums are taxed as per Section 80C, the maturity proceeds and death benefits come under the purview of Section 10(10D).

How Are ULIPs Taxed on Maturity?

ULIPs make you eligible to receive payouts on the expiry of the policy term, i.e., when the policy matures. This payout will depend on the returns earned by the securities in which your money is invested. These maturity payouts will be taxed as per the provisions of Section 10(10D). They will be tax-exempt if you meet certain conditions, such as those related to the amount of premiums. Otherwise, they will be taxed as Long Term Capital Gains (LTCG).

Tax Advantages of ULIPs Premiums and Returns

You can avail of dual link texttax benefits on premiums and the maturity amount when you buy ULIPs.

Tax Deductions on Premiums Paid

The ULIP premiums are deducted from your taxable income under Section 80C up to an amount of ₹1,50,000, subject to the following conditions:

• Plan issued before 1st April 2012: The maximum deduction allowed is 20% of the death sum assured.
• Plan issued after 1st April 2012: Premiums paid up to 10% of the sum assured will be exempt.

Tax-Free Maturity Benefits

ULIP’s maturity proceeds were also entirely tax-exempt under Section 10(10D) before February 2021. Now, you have to pay tax on ULIP maturity if the premium amount exceeds a certain limit. The same is explained in the sections below.

The Impact of Finance Act 2021 on ULIP Taxation

The tax advantages of ULIP have undergone significant changes since the implementation of the Finance Act 2021. It amended Section 10(10D) and introduced the following provisions:

• If you have paid ULIP premiums exceeding ₹2,50,000 for any year, your maturity proceeds will be taxable.
• Similarly, your maturity amount will be taxable if you have purchased multiple ULIP plans and have paid a total premium exceeding ₹2,50,000.

ULIP Taxation Based on Purchase Date

The taxability of ULIP returns and maturity proceeds also depend on the date on which they were issued.

Policies Bought Before 1st April, 2012

For policies bought before April 2012, an upper limit of 20% of the sum assured is applicable to Section 80C ULIP taxation. Let’s say you pay ₹30,000 premiums for ₹1,00,000 policy; the maximum deduction allowed will be ₹20,000 (20% of 1,00,000).

Policies Purchased Post- 1st April, 2012

In the case of policies purchased after 1st April 2012, you can avail of Section 80C deduction on ULIP premiums, subject to the maximum limit of 10% of the sum assured. For instance, you have a policy with a sum assured of ₹1,00,000 and pay premiums of ₹15,000. You can deduct ₹10,000 (10% of 1,00,000) from your taxable income.

Policies Issued After 1st February, 2021

The ULIP taxation benefit on premiums will remain the same as discussed in the point above, i.e., a maximum of 10% of the policy’s sum assured. However, Finance Act 2021 provisions will apply for maturity proceeds. This means the entire maturity proceeds will be tax-exempt unless the premiums exceed ₹2,50,000 in a particular year.

Tax Implications on Capital Gains from ULIPs

What happens in cases where your maturity proceeds do not meet the conditions placed by the Finance Act 2021 and are to be taxed? The amount will be taxed as capital gains as follows:

Case Studies: Understanding ULIP Taxation

Provisions related to the taxability of ULIP on maturity can sometimes be difficult to understand. However, considering certain examples can make this process easier.

Case Study 1: Premiums Within the Tax Limit

Let’s say you purchased a 10-year ULIP Plan on 1st April 2021 with a sum assured of ₹20,00,000. The maturity proceeds will be taxed depending on the annual premiums.

As the annual premiums do not exceed the specified ₹2,50,000 limit, the maturity proceeds of ₹30,00,000 will be exempt from taxation.

Case Study 2: Premiums Exceeding the Tax Limit

In contrast, let’s say you subscribed to a 10-year ULIP Plan on 1st November 2021 that has a sum assured of ₹30,00,000 and the following details.

The annual premiums exceed ₹2,50,000. Thus, you will have to pay taxes on maturity in the amount of ₹5,00,000 (Maturity Proceeds of ₹35,00,000 - Aggregate Premiums of ₹30,00,000).

Case Study 3: Premiums paid for multiple policies

Suppose you buy three ULIP Plans on the 1st of April 2021 with varying levels of sum assured and premiums.

Since the aggregate premium of Plan A, B, and C exceed ₹2,50,000, maturity proceeds of Plan C will be taxed. However, as the combined premium of Plan A and B is within the tax limit, their proceeds will be tax-free.

ULIP Taxation Rules and Implications

All the above ULIP maturity tax provisions discussed above can be summed up as follows:

• The ULIP premiums can be deducted from the taxable income under Section 80C up to the maximum limit of 10% of the sum assured. The overall limit of ₹1,50,000 also applies.
• Your maturity proceeds will be tax-free if your premium does not exceed ₹2,50,000 in a year. If it exceeds the said limit, the entire amount will be taxable as LTCG.
• The death benefits received by your loved ones under the ULIP Plan will be tax-free.

Conclusion

In addition to Unit Linked Insurance Plan taxability, you should also take note of other features like lock-in period, fund management fees, policy administration costs, surrender charges, etc. You can also consult a financial advisor to gain a better understanding of these features. Further, tax laws around ULIPs can change, as we saw with the Finance Act 2021. So, it is wise to stay informed about any new regulations.

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