Tax on Unit Linked Insurance Plan (ULIP) — Explained

This document covers

1. How ULIP works?
2. Tax benefits on premium paid for ULIP
3. Taxation of Maturity proceeds
4. Tax rates for the Capital gains tax for the policies issued on or after 01^st Feb 2021
5. Taxation of ULIP received at the time of Death
6. Taxation on surrender or partial withdrawal of ULIPs
7. Do I need to disclose the maturity amount in Income Tax Return

1. How ULIP works?

A portion of premium paid by any person is invested in life insurance and the remaining amount is invested in various market linked mutual funds like equity, debt or combination of both.

The taxability of ULIP depends on various factors like premium paid, withdrawals, maturity proceeds etc

2. Tax benefits on premium paid for ULIP

• The premium paid for ULIP's are eligible for deduction u/s 80C
• The maximum deduction that can be claimed u/s 80C is Rs 1,50,000 per financial year including other investments like LIC, PPF, PF etc
• The benefit is available for individuals and HUF
• The benefit is available under only Old tax regime. If any taxpayer is opting for new tax regime, he cannot claim any deduction.

3. Taxation of Maturity proceeds

The taxation of maturity proceeds of ULIP is different for the ULIP issued before 01^st February 2021 and issued after 01^st February 2021.

• ULIP's issued before 01^st February 2021:
  The amount received on the maturity of ULIP is fully exempt u/s 10(10D) if the premium paid during the policy term does not exceed 10% of actual capital sum assured.
• ULIP's issued on or after 01^st February 2021:
  
  • Budget 2021 has made some key changes in the taxation of maturity proceeds of ULIP because the high-net-worth individuals are claiming exemption u/s 10(10D) by investing in ULIP with huge premium.
  • The amount received on the maturity of ULIP is taxable if the premium paid per year exceeds Rs 2,50,000. The maturity proceeds are taxable under capital gains.
  • The amount received on the maturity of ULIP is taxable if the premium paid during the policy term exceeds 10% of actual capital sum assured.

4. Tax rates for the Capital gains tax for the policies issued on or after 01^st Feb 2021

• Equity-oriented ULIPs:
  
  • LTCG — Taxed @ 12.% if the gains exceed Rs 1.25 lakh in a year w.e.f 23 ^rd July 2024. Earlier it was 10%
  • STCG — Taxed @ 20% w.e.f 23 ^rd July 2024. Earlier it was 15%
• Non-Equity oriented ULIP's:
  
  • LTCG — Taxed @ 12.5% with No indexation w.e.f 23^rd July 2024. Earlier it was 20% with indexation
  • STCG — Taxed @ slab rates of individuals

5. Taxation of ULIP received at the time of Death

• The amount received by nominee at the time of death is tax free u/s 10(10D) irrespective of premium paid or sum assured
• This exemption applies to all policies issued before or after 01 ^st Feb 2021

6. Taxation on surrender or partial withdrawal of ULIPs

• If any ULIP is surrendered before the 5 year period, the surrendered amount will be added to normal income and taxed at slab rates of taxpayers
• The surrender value of ULIP is taxed under "Income from Other Sources".
• If the taxpayer has claimed any deduction u/s 80C, the deductions needs to be reversed.

7. Do I need to disclose the maturity amount in Income Tax Return?

• Yes. The taxpayers are required to disclose the ULIP amount received in their Income Tax returns under respective schedules depending on taxability
• If the taxpayers receives the ULIP maturity amount which is exempt, they are required to disclose the same in Exempt Income