ULIP Taxation: Understand how Taxes work on ULIPs

By: Cynthia Lemley
On: May 27, 2022

ULIP stands for Unit Linked Insurance Plan. ULIPs are a unique investment opportunity as they not only grow your money but also help you protect yourself and your loved ones. ULIPs make a great investment and have been popular among many investors as they provide a plethora of benefits. ULIP taxation is favourable for the investors as the payments you make towards the premium can be claimed as a deduction under section 80C of the Income Tax Act, 1961. Apart from this, the payout that you receive after the maturity of your policy has an added ULIP taxation benefit of being exempt under section 10(10D) of the Income Tax Act, 1961.

However, these benefits were very attractive to investors and in order for the government to make a better deal for themselves, the ULIP taxation was changed recently. The Central Board of direct taxes changed the ULIP taxation framework in the following manner:

The sum or the payout received on maturity will not be exempt under section 10(10D) if the total premium paid over the policy is more than Rs. 2.5 lakhs in a year. The ULIP taxation provision was aimed to create a level playing field among the investment opportunities offered by ULIP as well as various mutual funds.

However, if you are someone who is not paying an annual premium amount that is more than Rs. 2.5 lakhs, you are eligible to claim the general deduction and exemption under the Income Tax Act, 1961.

Apart from this, if you are someone who has purchased a ULIP policy after April, 2012 you are entitled to claim a deduction under section 80C of the act only if your premium is less than 10% of your maturity amount. If your sum is equal to or more than 10% then you will be able to avail a deduction equal to 10% of the total sum assured.

In a scenario, wherein you are someone who has invested in a ULIP policy before April 2012, then you can avail a deduction under section 80C of the act if your premium is less than 20% of your maturity amount. However, if your premium exceeds more than 20% of your claim amount, then you will be eligible to claim or avail a deduction that is equal to 20% of the total sum assured.

ULIPs are designed to be a hybrid policy wherein you are not only provided with a life cover but also with an opportunity to invest and in this case, you can tailor your policy to suit your financial needs as well as your risk appetite. In order to invest in a ULIP, you need to understand the ULIP taxation policy as well as research the investment product well before you make any decision. A decision without the understanding of any financial product can be a catastrophe for you and you may end up wasting your time. You may take the assistance of a tax advisor as well as a professional in order to make an investment in ULIP.