ULIP Tax Benefits: Everything You Need To Know

A Unit Linked Insurance Plan (ULIP) is essentially a combination of both an insurance policy and an investment tool. To put it simply, by opting for Unit Linked Insurance Plan you get life cover as part of your investment plan. Apart from this dual benefit of financial planning, ULIPs are also instrumental in saving taxes. 

If you want to develop a well-rounded understanding of ULIP, then this article is just what you need. Here we will break down all that there is to know about ULIP. To discover more about this investment technique and the ULIP tax benefits, read the following blog.

Things to Know About the ULIP Tax Benefits

Here are some key features of the tax benefit offered by ULIPs:

Tax Saving Benefit

For ULIP policyholders, there is an option of availing tax deductions up to INR 1,50,000. These are applicable to the policy premium amounts paid with respect to the ULIP. This is governed under sections 10D and 80C of the Income Tax Act of 1961. 

ULIP Tax Benefits for Maturity

The taxes under section 10 (10D) of the Income Tax Department, the market-linked investment plan, offer a maturity amount free of taxes. But there is a clause involved. It basically entails that the premium should be less than 10 percent of the sum assured

ULIP Tax Benefits on Returns

Earlier, ULIP returns were exempt from taxes if your annual investment did not exceed 10% of the plan’s life cover. However, in 2021 the government passed new regulations for all ULIPs bought on or after 1st February, 2021. Now, if the annual premium of your ULIPs is more than Rs 2.5 lakh, then your returns will be taxed, depending on the ULIP’s asset allocation.

Tax-free Withdrawals in Case of Death

In the event of a policyholder meeting with an unfortunate incident that leads to their demise, there is a provision for the family members to receive the sum assured. Along with this sum, they will receive the returns that are generated by the ULIP. This payout is exempt from taxes under section 10(10)D of the Income Tax Act.

Tax-Benefit- Partial Withdrawal

In case of ULIPs, partial withdrawals are tax-free. After 5 years of the lock-in period, there is no ULIP tax deduction in case of partially withdrawing money from a ULIP plan. While the sum you choose to withdraw depends on your insurance provider and policy type, you must leave sufficient funds for operational costs and life cover charges.

Tax Deductions on Top-ups

The policyholders of ULIP have the option of increasing their investment through purchasing top-ups. It should be noted that these top-ups are also entitled to ULIP plans tax benefits.

Long-term Tax Benefits

The policyholder can enjoy ULIP tax benefits for a long-term investment. The lock-in period for the same would be around five years and one can profit for at least 5 years by saving tax on premiums. It should also be noted that one can gather more tax benefits if they continue their policy.

UPIL Tax Benefits: Section 80C

The Government of India offers certain tax-deductions that aid investors financially. And one of the most significant features of ULIP is the tax benefit that comes with it under Section 80C of the Income Tax Act, 1961. With the help of such inclusion, you will feel safer regarding your investment. 

Here are the features of ULIP Tax Benefits under Section 80C:

1. Section 80C allows you to avail tax deductions up to Rs.1.5 lakh, with regards to the policy premiums that you pay for ULIP.
2. If the ULIP has been purchased after 1st April 2012, the premium you pay should be less than ten percent of the sum assured to avail this tax benefit. So, if the sum assured is Rs. 10 lacs and your annual premium is less than 10% of it (Rs. 1 lac), only then you can avail ULIP tax benefit.

Exempt-Exempt-Exempt Tax Category

ULIPs belong to the Exempt-Exempt-Exempt tax category. They are generally applicable on long-term investment plans like Employee Provident Fund, Public Provident Fund, National Pension Scheme etc. 

Now let us understand what the triple E in Exempt-Exempt-Exempt Tax Category means.

• Under the first category of exemption under EEE, the amount invested in the ULIP is deemed deductible from your annual income as per the provisions of the act. In other words, the taxable income used for said investments becomes deductible.
• Under the second exemption as per EEE, the interest that you earn after investing in a ULIP is tax-exempt if your premium is less than Rs. 2.5 lakhs per annum.
• At the time of maturity, the investor earns a specific income in bulk after their ULIP matures. This income is also free from tax as per the Income Tax Act.

How does ULIP Taxation Work Now?

Here are some key characteristics of tax-saving ULIP that one must know before investing. They are as follows:

• The key provisions of the Income Tax Act that are applicable to ULIP are governed under Section 80 C and Section 80CCC. Section 80C pertains to life insurance premiums, whereas Section 80CCC is the amount that is paid towards pension plans. 
• For one financial year, a ULIP tax benefit of up to INR 1,50,000 is allowed. This does not imply that you cannot invest a higher amount. Rather, the ULIP plan tax exemption would only be applicable to INR 1,50,000 for a financial year. 
• One must note that the plan must stay active for at least five years for the policyholder to claim the ULIP tax benefit. If you decide to stop paying the premium fees for the plan during the fifth year, then ULIP tax benefits that were taken in the first four years are liable to be withdrawn.
• For ULIPs that started before 1st February 2021, returns from ULIP will not be taxed if your annual premium is less than 10% of the sum assured.
• For ULIPs that started on or after 1st February 2021:

• Your ULIP returns will be taxed if the annual premium exceeds Rs 2.5 lakhs.
• The returns will be taxed as a Capital gain; long-term or short-term will be decided by the tenure 
• If it is an equity-oriented investment and the amount of returns exceeds Rs 1 lakh, the tax will be charged @10%. For other investments, the taxes will be 20%.

6 FAQs About ULIP Tax Exemption