ULIP is a financial product in which the insurance company invests the premium amount paid by the policyholder in multiple financial instruments, such as bonds, stocks, & mutual funds. It offers a dual benefit of insurance & investments, where a part of the premium is allocated towards life insurance & the remaining part is invested in market-linked securities. In case of the policyholder’s sudden demise, the beneficiaries will receive the death benefit or the fund value, whichever is higher. If the policyholder survives the plan, the policyholder will receive the fund value that would have been accumulated, depending on the fund’s performance. Also, it provides a flexible option to switch between the funds anytime during the policy tenure.
Taxation Advantages of ULIP
Provided are the taxation advantages of the Unit Linked Insurance Plan:
1. Taxation Advantage on the amount of Premium Paid
One is allowed to avail a tax deduction of up to INR 1.5 lakhs annually on the amount of premium paid under section 80C of the Income Tax Act, 1961. This is applicable according to the old tax regime, which offers a combined total limit of INR 1.5 lakhs, including other investments, such as PPF, life insurance premiums, ELSS, etc.
2. Limitations on Deductions (Depending on the Date of Purchase)
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ULIPS bought after April 1, 2012
- It allows for avail 100% deduction of tax if the annual premium is below 10% of the sum assured.
- The percentage of tax deduction is reduced to 10% of the amount of sum assured, in case the premium amount is more than 10% of the sum assured.
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ULIPs bought before April 1, 2012
- In case the premium amount is less than 20% of the sum insured, it allows to avail a tax deduction
- If the premium amount is above 20%, it allows to avail a tax benefit of 20% of the sum insured.
3. Tax-Free Death Benefits for Nominees
In case of the sudden demise of the policyholder, the death benefit received along with the bonus accrued is exempt from the tax under section 10(10D) of the Income Tax Act, 1961. This ensures a strong financial backup to the family members at the time of difficulty, without deducting any taxes, irrespective of whether the premium amount has been paid or not.
4. Tax Exemptions on Maturity Proceeds
Under this head, we will be discussing the tax treatment of the ULIP Returns received at the time of maturity. According to Section 10(10D) of the Income Tax Act, 1961, the maturity benefits received are exempt from tax according to the old tax regime. Let us discuss the applicable terms in detail:
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ULIPS issued on or before February 01, 2021
In case the ULIPs are issued before February 01, 2021, section 10(10D) allows the receipt of maturity proceeds to be fully exempt from tax irrespective of the premium amount paid during the year.
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ULIPS issued after February 01, 2021 – Premium up to INR 2.5 lakhs
In case the ULIPs are issued after February 01, 2021, & the premium amount paid against the same is up to INR 2.5 lakhs during the year, the maturity proceeds will be exempt from tax according to Section 10(10D).
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ULIPS issued after February 01, 2021 – Premium above INR 2.5 lakhs
In case the ULIPs are issued after February 01, 2021, & the premium amount paid against the same is up to INR 2.5 lakhs during the year, the maturity proceeds are hence taxable. These proceeds will be considered as capital gains & will be taxed according to section 10(10D) of the Income Tax Act, 1961.
If you have multiple ULIPs in h& issued after February 01, 2021:
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If the total premium is under INR 2.5 lakhs per annum
In case the total annual premium amount combined is less than INR 2.5 lakhs per annum during the policy tenure, then the maturity benefit to be received from all the policies combined is exempt from the tax u/s 10(10D) of the Income Tax Act, 1961.
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If the total premium is above INR 2.5 lakhs per annum
In case the total annual premium amount of all ULIPs combined is more than INR 2.5 lakhs per annum during the policy tenure, then the maturity amount to be received will be exempt in case of policies whose total premium is under INR 2.5 lakhs. &, the maturity benefit will be taxable if the total premium exceeds INR 2.5 lakhs.
5. Tax Benefits on Top-Up Premiums
- Deduction of Tax on the top-up amount, subject to INR 1.5 lakhs annually
In case of eligible investments, if the total amount of top-up premium paid is up to INR 1.5 lakhs, the policyholder is allowed to claim a tax deduction. This is subject to tax being filed under the old tax regime.
The maturity benefit is exempt from tax if the total of all annual premiums paid, including top-up premiums, is under INR 2.5 lakhs in case of ULIPs purchased on or after February 01, 2021.
6. Tax-Free Partial Withdrawals After Lock-in Period
The partial withdrawals are exempt from tax if:
- They are made once the 5-year lock-in period has been met
They can be exempt from tax if they are withdrawn once the 5-year lock-in period has been completed.
- The amount of withdrawal is under 20% of the fund value
They can be exempt if the amount of withdrawal remains less than 20% of the total fund value.
7. Long-Term Tax Efficiency & Wealth Creation Benefits
They offer a long-term investment horizon, leading to market-linked growth & initiation of tax savings. The condition of a 5-year lock-in period helps build financial discipline. This plan is flexible as it offers to switch between the funds by redirecting premium amounts, thereby remaining a tax-efficient tool.
Conclusion
ULIPs act as a great tool for long-term financial planning, which provides an ideal blend of life insurance coverage, investment options, & tax savings options. It is advised to consult a financial advisor to understand the basic terms & conditions of the plan, which will help you make an informed decision. One can plan for the ULIP depending on their financial situation & future financial obligations to get the financial security & avail tax benefits along with it.
