Taxation on Premiums Paid

Section 80C of The Income Tax Act, 1961, allows you to claim deductions on the premiums paid for a ULIP. However, specific criteria and limits apply

Limitations:

The maximum limit for deductions under Section 80C is up to ₹ 1.5 lakh per annum. Moreover, this cap is for all eligible investments and expenses under Section 80C, including ULIP premiums.

If you bought a ULIP after April 1, 2012

• You can avail an income deduction on the total annual premium paid under Section 80C^* only if the premium amount is less than 10% of the claim amount
• If the premium exceeds 10% of the total sum assured, you will be able to avail a deduction on the amount equal to 10% of the total sum assured

If you bought a ULIP before April 1, 2012

• You can avail an income deduction on the total annual premium paid under Section 80C^* only if the premium amount is less than 20% of the claim amount
• If the premium exceeds 20% of the claim amount, you will be able to avail a deduction^* on the amount equal to 20% of the total sum assured

What do you mean by maturity taxation in a ULIP?

ULIP maturity taxation refers to the tax rules on the maturity benefits of your ULIP. As per the current rules, you can claim deductions on the premiums paid towards a ULIP under Section 80C^*. The payout that you receive at the end of the policy term is also tax-exempt subject to conditions under Section 10(10D)^* of the Income Tax Act, 1961. However, these laws are subject to the conditions mentioned below.

What are the rules regarding the maturity benefits of a ULIP?

Below are the rules regarding the taxation* of maturity benefits of a ULIP:

• If a ULIP or multiple ULIPs have been issued to you on or before February 1, 2021, then your maturity benefits for each of those ULIPs are tax-free^* subject to conditions under Section 10(10D) of The Income Tax Act, 1961. This is irrespective of the total premiums you pay towards your policy/policies in any given year during the tenure of these policies
• If a ULIP has been issued to you on or after February 1, 2021 with annual premium less than ₹ 2.5 lakh for all the years during the tenure of the policy, then the maturity benefits from the ULIP is tax-free^* subject to conditions under Section 10(10D) of The Income Tax Act, 1961
• If a ULIP has been issued to you on or after February 1, 2021 with premium more than ₹ 2.5 lakh in any given year during the tenure of the policy, then the maturity benefits from the ULIP is taxable. This is as per the fourth proviso of Section 10(10D)^* of The Income Tax Act, 1961
• If multiple ULIPs have been issued to you on or after February 1, 2021, then the below rules apply as per Section 10(10D)^* of The Income Tax Act, 1961:
  • If the total annual premium for all these ULIPs issued on or after February 1, 2021 is less than ₹ 2.5 lakh for all the years during the tenure of all these policies, then the maturity benefits received from each of these ULIPs is tax-free^* subject to conditions mentioned under Section 10(10D) of The Income Tax Act, 1961
  • If the total premium for all these ULIPs issued on or after February 1, 2021 is more than ₹ 2.5 lakh in any given year during the tenure of the policy, then those policies whose combined total annual premium is less than ₹ 2.5 lakh will provide tax-free^* maturity benefits subject to conditions mentioned under Section 10(10D) of The Income Tax Act, 1961. The maturity benefits of the remaining policies will be taxable
• The amount received under ULIP in the occasion of death of life assured is tax-free^* subject to conditions under section 10(10D) of The Income Tax Act, 1961

Let us understand the above with the below illustration:

Please note that the amount received under ULIP in the occasion of death of life assured is tax-free* subject to conditions under section 10(10D) of The Income Tax Act, 1961

COMP/DOC/Aug/2022/128/0962

Taxation on Partial Withdrawals

Insurance policies have tax benefits. Premiums paid for insurance policies, including ULIPs, qualify for deductions under Section 80C of the Income Tax Act, 1961. Also, insurance proceeds or maturity amounts are exempt, subject to meeting the conditions of Section 10(10D) of the Income Tax Act, 1961.

In case of partial withdrawals, you have to meet both the conditions to get tax benefits. For example, the lock-in period of a ULIP is 5 years. If an individual surrenders the policy before the lock-in period, the tax benefits will be reversed. Similarly, Section 10 (10D) also offers tax benefits on ULIP maturity payouts or partial withdrawals under specific conditions. Thus, it is advisable to consult a financial advisor to understand the various ways in which you can gain the maximum tax benefit.

Conclusion

ULIPs offer the dual benefit of investment and life insurance. They help you secure your future with good returns and, at the same time, keep your loved ones financially protected in case of an unfortunate event.

ICICI Pru Signature is one such ULIP that provides you with life cover^# along with an option to invest in equity, balanced or debt funds or a combination of them. The plan also offers you an option to switch between funds^~ as per your choice without any additional charges^{^}. With ICICI Pru Signature, you can also avail income tax^* benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961.

COMP/DOC/Oct/2024/1510/7381

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