ULIPs and Taxes
ULIPs and Taxes
Unit Linked Insurance Plans or ULIPs offer several beneficial features that can help you grow your money and secure your loved ones in your absence. Whether you are saving for retirement, your child’s higher education, or to purchase a house, a ULIP can help you fulfil your goals.
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.
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 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:
| # | No.of ULIPs issued | ULIP # | ULIP issuance date | Annual premium | Taxation on maturity benefits |
|---|---|---|---|---|---|
| 1 | 1 | A | January 1, 2021 | ₹ 3 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 |
| 2 | 2 | A | June 20, 2019 | ₹ 2 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 |
| B | January 1, 2021 | ₹ 2.5 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 | ||
| 3 | 1 | A | March 1, 2021 | ₹ 2 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 |
| 4 | 2 | A | June 20, 2019 | ₹ 2 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 |
| B | March 1, 2021 | ₹ 2 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 | ||
| 5 | 3 | A | March 1, 2021 | ₹ 1 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 |
| B | April 1, 2021 | ₹ 0.3 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 | ||
| C | June 1, 2021 | ₹ 1 lakh | Tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961 | ||
| 6 | 4 | A | March 1, 2021 | ₹ 2 lakh | In this case, the policies B, C and D have a combined total annual premium of ₹ 2.4 lakh, which is less than the ₹ 2.5 lakh limit. Hence, the maturity benefits for these three policies will be tax-free subject to conditions under Section 10(10D)* of The Income Tax Act, 1961. If the premium of policy A is added, the combined total annual premium becomes more than ₹ 2.5 lakh, hence, the maturity benefits for policy A will be taxable. Alternatively, policies A and B can be chosen for tax-free maturity benefits under Section 10(10D) of The Income Tax Act, 1961, as the combined total annual premium for these two policies is less than ₹ 2.5 lakh. In this case, the maturity benefits for policies C and D will be taxable. |
| B | April 1, 2021 | ₹ 0.3 lakh | |||
| C | June 1, 2021 | ₹ 1 lakh | |||
| D | June 1, 2021 | ₹ 1.1 lakh |
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
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.
FAQs
1. Are ULIPs also applicable for GST?
Yes, GST (Goods and Services Tax) at the rate of 18% is applicable on ULIP charges
2. Is a ULIP interest tax-free*?
ULIPs offer tax* benefits on the payouts received under the policy subject to conditions prescribed under Section 10(10D) of the Income Tax Act, 1961.
3. What is the minimum tax* exemption that can be claimed under a ULIP?
There is no minimum tax* exemption that can be claimed under a ULIP. However, you can claim a maximum tax* deduction of up to ₹ 1.5 lakh in a financial year under Section 80C of the Income Tax Act, 1961
4. Is the payout from a ULIP tax-free* after five years?
After the lock-in period of five years, the maturity amount or the surrender amount is tax-free* if the life cover offered by your ULIP is at least ten times your annual premium subject to conditions prescribed under Section 10(10D) of the Income Tax Act, 1961.
COMP/DOC/Feb/2023/212/2311
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