Selling ULIPs and Taxes: What You Need to Know

Chandra Shekar

Unit Linked Investment Plans, or ULIPS, combine both insurance and investments. The premium is invested in equity, debt, and money market instruments after deducting applicable charges. The person choosing a ULIP Investment Plan benefits from an increase in the value of the invested amount in addition to the benefits of insurance. This article discusses the taxability of ULIP premium payments and the money received from them at maturity or redemption.

What is the deduction under Section 80C?

Section 80C permits the deduction of the ULIP premium paid from gross income in the financial year in which it was paid.

For ULIP Investment Plans bought after 1st April 2012

The deduction for investing in ULIPs is only permitted for ULIP plans purchased after or on 1st April 2012 if the premium is below 10% of the sum assured for any of the years in which you have paid the premium. An illustration will help to clarify this.

For instance, if a ULIP plan’s total sum assured is Rs. 100,000, the ULIP premium paid must not exceed Rs. 10,000.

The complete sum assured will be entirely taxable in the year in which the sum assured is obtained when the premium paid is greater than 10% of the total sum assured. It is crucial to remember that in this situation, if the money is received as a result of a death, it will never be subject to taxation.

For ULIP Investment Plans bought after 1st April 2013, for disabled

If the ULIP Plan is bought on or after 1st April 2013, the premium paid must be no more than 15% of the sum assured, provided that the ULIP is purchased to insure someone else’s life. This covers the following conditions:

A disabled individual or an individual with a severe disability as defined by Section 80U or
Having an illness or condition that is listed in the rules set under Section 80D

The sum assured would be completely taxable during the year of receipt if the premium paid is greater than 15% of the sum assured.

It is crucial to remember that in this situation, any money received as compensation for death would not be subject to taxation.

For ULIP Investment Plans bought before 1st April 2012

Before 1st April 2012, the cap on premium payments for ULIP plans was 20% rather than 10%. Therefore, the sum assured would be completely taxable during the year of receipt if the premium paid was greater than 20% of the total assured.

It is crucial to remember that in this situation, any money received as compensation for death would not be subject to taxation.

Everything You Need To Know About Maximum Tax Deduction For ULIPs

In this section, we will find out more about ULIP tax benefits. The most that can be deducted annually under Section 80C is Rs. 150,000. In the year when the premium is paid, this deduction is permitted. This deduction is permissible in the following ways:

People are permitted to pay the premium for themselves, their spouses, or any children.
When it comes to HUFs, the HUF is permitted to keep the premiums that were paid in favour of any HUF member.

It is significant to remember that this restriction of Rs. 1,50,000 applies to investments in a variety of designated instruments that are qualified for a deduction as per Section 80C as a whole and not just ULIPS.

Insurance plans, ELSS, tax-saver fixed deposits, PPF and other investments are just a few of the financial instruments that offer deductions under Section 80C. However, it is significant to note that the overall sum invested in all of these instruments is Rs. 150,000.

Tax On Amounts Received At An Early Redemption Or During Maturity

If you wish to continue the ULIP investment plan for at least 5 years, the money received at maturity is not taxable.

If it was terminated before it had been in effect for 5 years:
By providing notice or by failing to pay the premium.

The earlier Section 80C deduction would become taxable in such circumstances. The premium that was previously paid and for which a deduction was taken will now become taxable in the year that the policy is cancelled.

Following the revisions to the rules governing income tax and securities transaction tax, the Government announced new regulations for calculating the tax on capital gains on the proceeds of ULIPs with a high premium. The proceeds may be exempted if the annual premium is up to Rs. 2.5 lakh for policies (cumulatively). Anything more than this amount will be taxable for policies issued after 1st February 2021. For policies issued before this date and those after 1st April 2012, the maturity proceeds will be tax-free only if the premium does not exceed 10% of the sum assured. It is again worth mentioning that maturity proceeds are tax-exempted for any claim arising from the policyholder’s demise, irrespective of the premium paid and other aspects.