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Understanding ULIP Taxation

Understanding the tax implications of Unit Linked Insurance Plans (ULIPs) is crucial for making informed investment decisions. ULIPs offer a unique combination of insurance and investment benefits, along with significant tax advantages. This article breaks down the complex taxation rules of ULIPs, helping you maximize your returns while staying compliant with current tax regulations.

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ULIP Taxation: What Is The Taxability of ULIP On Maturity?

ULIP – How are the Maturity Proceeds Taxed?
June 28, 2024

Table of Content

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder  

Investment and security - these are two important pillars of your financial strength and proper decisions in these two domains can ensure your financial freedom for life. Most of us are always on the lookout for guaranteed income insurance plan for safe returns and capital gains and the market is full of many such options. However, ULIPs (Unit Linked Insurance Plans) are exclusively beneficial and widely trusted for their comparative advantages.

Not only do ULIPs provide joint coverage of security and investment for your funds, but also offer a range of exclusive tax benefits both at the time of investment and at the time of returns. Premiums paid for ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. 

Tax Benefits on Premiums

Under Section 80C of the Income Tax Act of 1961 (the Act), policyholders can avail deduction  up to 1.5 lakhs rupees for the premiums they pay for life insurance policies, including ULIPs.

Premiums paid for life insurance policies before April 1, 2012, are eligible for tax benefits under Section 80C up to a maximum of 20% of the death sum assured. 

Tax benefit shall be available for premiums paid  upto  10% of the death benefit for plans issued on or after April 1, 2012.

It is also important to know that ULIPs allow policyholders to switch between different fund options. Such switches within ULIP funds are not considered taxable events. Therefore, investors have the flexibility to manage investments without incurring tax liabilities.

Tax Benefits on Maturity

As stated in Section 10 (10D) of the Act, certain provisions apply to the taxability of ULIPs, and it is possible that the amount received as maturity proceeds from a ULIP will not be taxed on satisfaction of certain conditions.

Funds received upon maturity from your ULIP taxation may not be subject to tax treatment if your policy meets all the outlined requirements as per income tax laws.

What is Meant by ULIP Taxation on Maturity?

The taxation of invested funds occurs at maturity when a Unit Linked Insurance Plan (ULIP) policy ends.

Whether or not the funds paid out of a ULIP upon maturity are taxable depends, in most instances, on the regulations outlined in the Income Tax Act. Upon maturity, the funds from a life insurance policy, including a ULIP, can be exempt from taxes on satisfaction of the conditions specified in section 10(10D) of Income tax act, 1961

However, certain conditions must be satisfied before claiming deductions. If the annual premium payments exceed a specific percentage of the sum assured, the income received at maturity may be taxable.

For ULIPs purchased after 1st April 2012

The income tax deduction under section 80C can be availed when the premium is less than 10% of the sum assured.

If the premium is more than 10% of the sum assured the tax deduction is allowed on the amount equal to 10% of the sum assured.

For ULIPs purchased before 1st April 2012

The deduction under section 80C can be availed when the premium is less than 20% of the sum assured.

If the premium is more than 20% of the sum assured the tax deduction is allowed on the amount equal to 20% of the sum assured.

For ULIPs Issued on or After 1st February 2021

Section 10 (10D) exempts ULIP policies from taxation whose policy issuance dates are on or after February 1st , 2021, provided that no single policy's premiums exceed Rs 2.5 lakhs in any of the previous years during the term of any of those policies.

This provision concerning the tax on ULIP maturity taxation may also apply to policyholders who acquire multiple ULIPs on or after February 1, 2021. Any fiscal year during the policy's duration in which the total premium for all policies, individual or combined, exceeds Rs 2.5 lakhs may cause the policy's maturity proceeds to be taxed according to current law. . Any profits from these policies shall  be considered as long term capital gains, depending on the assets used.

Notably, the death benefit paid to the policy's nominee is exempt from taxation under Section 10 (10D) of the Act.

Capital Gains Taxability of ULIP On Maturity

The long-term capital gains (LTCG) tax applies to ULIPs as it does to all equity-oriented investments. The long-term capital gains (LTCG) tax rate is as high as 10%. However, taxes are not withheld upon the demise of a person.

Capital Gains

Period of holding

Tax

Long-term capital gains

More than 12 months

10% on gains above Rs 1 lakh

Short-term capital gains

12 months or less

15% on overall gains

Examples of ULIP Taxation on Maturity

Example 1: 

While both Mr A and Mr B purchased ULIP plans after 1st February 2021, Mr B had a maturity date of 10 years and a value of 30 lakh rupees. Annual premiums for Mr. A are Rs 85,000, and Mr. B's are Rs 2.6 lakh.

Mr. A will receive twenty lakh rupees, and Mr. B will receive forty-eight lakh rupees when the term ends in ten years.

These policies currently cost Mr B over 2.5 lakh rupees per annum in premiums. Since Mr. A's annual premium was Rs 85,000 throughout the policy term, he is eligible for an exemption under Section 10(10D). In contrast, Mr B is subject to tax on Rs 18 lakh (i.e., Rs 48 lakh - Rs 30 lakh) because his annual contribution was more than Rs 2.5 lakh (as the contribution exceeded 2.5 lakh  for policy purchased after February 1, 2021).

Example 2: 

A ULIP policy will include the following details for a particular individual for ULIP taxation on maturity.

ULIP

X

Date of issue

April 1, 2021

Annual premium 

Rs 2.5 lakh

Sum assured

Rs 25 lakh

Consideration as received on November 1, 2031on maturity

Rs 32 lakh

Taxability as per fourth proviso to Section 10(10D) of the ITA:  

Under clause (10D), the consideration received will not be subject to tax since the annual policy premium did not surpass Rs 2.5 lakh.

Example 3: 

By purchasing ULIP, an individual has met all of the criteria outlined in Section 10(10D). No other ULIPs have been purchased by him before the fiscal year 2031-32. See the table for all the information:

ULIP

X

Y

Z

Date of issue

April 1, 2021

April 1, 2021

April 1, 2021

Annual Premium 

Rs 1 lakh

Rs 1.5 lakh

Rs 3 lakh

Sum assured

Rs 10 lakh

Rs 15 lakh

Rs 30 lakh

Consideration received as on November 1, 2031,

Rs 12 lakh

Rs 18 lakh

Rs 34 lakh

Taxability of maturity proceeds

Not taxable

Not taxable

Taxable

All taxes must be paid in accordance with the following provisions of the Income Tax Act (ITA):

Where the aggregate premiums for all of your ULIPs do not exceed 2.5 lakh rupees in any  of the fiscal year; you will not be required to pay tax on ULIP you contribute to any one plan (10D).

Since the combined yearly premium for ULIP X, Y, and Z exceeds Rs 2.5 lakh throughout the policy's duration, Clause (10D) does not apply to the consideration received under ULIP Z.

The consideration received under ULIPs X and Y will be exempt under clause (10D) since the combined annual premium for both policies does not exceed Rs 2.5 lakh for any fiscal year during the term of these policies as ULIP tax benefits.

ULIP Taxation Rules and Implications

Some of the tax rules and implications include: 

  • A complete familiarity with the tax regulations governing ULIP taxation is necessary for optimising returns. Premium payments can be deducted under deductions under 80C.  If you do this, your taxable income might decrease by up to 1.5 lakh rupees annually. Premiums must not exceed 10% of the sum assured for policies issued on or after 1st April 2012. .
  • If the premium stays below 10% and upto Rs 2.5 lacs per annum, the maturity proceeds are not subject to taxes as per  Section 10(10D).
  • In addition, the death benefit will not be taxed.
  • It should be remembered that tax regulations can and do change. Consult a financial advisor if you are interested in learning the current regulations.
  • When investing in ULIPs, keep in mind the different fees. Expenses like life assured insurance premiums and investment management fees are two examples.
  • Insurance firms collect what is formally known as fund management fees from you in exchange for overseeing your investment portfolio.
  • You may be subject to a surrender charge if you decide to cancel the plan before the lock-in period ends.
  • You can make an educated decision with this data at your disposal. Be sure to consult a financial advisor and read the fine print if you want a strategy that takes your needs and aspirations into account.

Revised: Finance Tax, 2021

As of February 1, 2021, the new provisions added to Section 10(10D) by the Finance Act of 2021 will be in force.

As a result, the following situations will  apply to specific ULIP plans:

At maturity, you'll have to pay taxes on the gain amount  if your insurance premiums were 2.5 lakh rupees or more in aggregate for all the policies for any previous year.

Conclusion 

Due to its benefits, ULIPs may be a good choice for people who want to invest in market-linked instruments and protect their family's financial future.

You can make the most of your returns when they're due by knowing how ULIPs are taxed upon maturity. An exemption on the taxability of ULIP on maturity proceeds may be available under Section 10 (10D) of the Act for any ULIP policies issued after February 1, 2021, with an aggregate annual premium of up to Rs 2.5 lakhs. For policies issued between April 1, 2012, and February 1, 2021, the maturity proceeds may be exempt from taxes if the premium does not surpass 10% of the death sum assured.

Talk to a tax expert or financial planner if you're still confused or worried. If you do this, you might be better able to plan for possible tax responsibilities and make informed investment choices.

FAQs

Is ULIP taxable on redemption?

Upon compliance of the above mentioned provisions the maturity proceeds are usually not subject to be taxed.

 Is exemption under section 10 10D on ULIP maturity amount received?

Section 10(10D) of the Income Tax Act provides an exemption for ULIP maturity proceeds under specific circumstances.

Is ULIP completely tax-free?

Under certain conditions, ULIPs are eligible for a tax exemption on the money they receive upon maturity, if they satisfy the conditions provided in Section 10(10D) of the income tax law. But things like fund transfers and partial withdrawals might have tax implications.

Is there tax liability on ULIP maturity proceeds when the premium exceeds a specified limit?

ULIP maturity proceeds are not taxable unless the premium amounts go beyond a particular threshold. However, because of the potential for rule changes, it is prudent to monitor current tax regulations.

What is the maximum amount for claiming tax deductions under Section 80C for premium amounts?

According to Section 80C of the Income Tax Act, 1961, you are allowed to deduct premium payments, including ULIP premiums, up to ₹1.5 lakh from your taxable income each fiscal year.

Are the premiums invested in ULIPs eligible for tax deductions?

You can deduct up to ₹1.5 lakh per fiscal year of premiums paid towards ULIPs from your taxable income according to Section 80C of the Income Tax Act.

Is there a tax on the maturity proceeds from ULIPs?

If you meet the requirements, such as keeping the policy for a certain amount of time as prescribed under law as well as satisfying the threshold limit for premium payment , you can avoid paying taxes on the money you get when your ULIP policy matures under Section 10(10D) of the Income Tax Act.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Disclaimer

Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions.

Tax Laws are subject to change from time to time.

Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.  

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the 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 name of the company, name of the brand and name of the contract 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 future prospects and returns.

HDFC Life Insurance Company is only the name of the Life Insurance Company and various funds offered under this contract is only the name of the linked insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns.

18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

** The past 5 year fund performance of HDFC Life Discovery Fund (SFIN: ULIF06618/01/18DiscvryFnd101) as on 30th November 2024. The benchmark taken into consideration here is is Nifty Mid Cap 100 which as a return of 26.77% as on 30th November 2024. HDFC Life Discovery Fund is available with HDFC Life ULIPs which comes with a life cover. Please note past fund performance is not indicative of future performance.

ARN- ED/06/24/12550

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