Understanding The Tax Implications On ULIP Maturity Benefit Payouts

According to the latest Indian Union Budget for the year 2021-22, the tax exemptions on maturity proceeds of ULIP have been removed by the government. The new guidelines will be applicable on ULIP bought after February 1st, 2021, and the aggregate premium for a financial year is more than Rs. 2.5 Lakhs. 

Any gains made on such a policy will be subjected to LTCG (long term capital gains) tax as applicable on the equity-based investments. However, the death benefit received due to the untimely passing of the policyholder will still remain tax exempted as per the Income Tax laws of India. 

The new guidelines dictate that LTCG from equity-based investments made in the best ULIP plan in India with a holding period of more than one year will be taxed at 10%. 

As the ULIP full form – Unit Linked Insurance plan suggests, it is a market-linked investment unit with a small portion of life insurance that comes with a lock-in period of 5 years. The amount your invest in a ULIP is eligible for a tax rebate u/s 80C of the Income Tax Act up to Rs. 1.5L per annum only if the premium does not exceed more than 10% of the sum assured. 

Bridging The Gap Between Mutual Funds And ULIPs

At present, life insurance policies enjoy tax-free maturity proceeds u/s 10 (10D). However, the government brought back the 10% LTCG tax on the sale of equity shares above Rs. 1 Lakh. Ever since, the investors have asked that similar conditions be made applicable on equity-based ULIPs as well. 

By taxing the proceeds, the experts believe that the investors will be able to consider ULIP for their life insurance benefit first and then for its investment. Today, high net-worth individuals often park their money in high ULIP premiums to enjoy only its tax benefits. 

With the tax exemption on the maturity benefit with large premiums, the purpose of ULIP and its true intent was being defeated. But to keep up with its intent and clause to provide real benefit to genuine investors, the death benefit to the policy beneficiary is kept tax free. So, it is advised that you do your research and invest in the best ULIP plan in India.

The tax exemption is still applicable on the ULIP premium for more than one policy as long as the aggregate of all the premiums do not exceed Rs. 2.5L. The ULIPs where no exemption is applicable will be considered as a capital asset, with section 112A being relevant to equity-oriented mutual funds and shares. 

EEE Advantage

After the government introduced the LTCG tax on equity-related investments in 2018, insurance providers have pushed the sales of ULIP as an EEE category (exempt-exempt-exempt), just like Public Provident Fund and Employee Provident Fund. 

Investors investing in ULIP are free to choose the fund mix – small, mid, and large-cap. They can also select debt funds if they are risk-averse and want to keep their investments relatively safe. In fact, a ULIP investor can also switch the fund options by paying nominal switching charges to the insurance provider. Thus, many consider investing in the best ULIP plan in India.  

Investing in ULIPs

If you want to continue enjoying the tax benefits on ULIP proceeds, along with the dual benefit of insurance and investment, you need to keep the value of premiums low, that is, under Rs. 2.5 Lakhs. It would help if you also choose an insurer with reliable fund managers who have a solid track record of providing returns on your investment in the long run. 

But if you are a first-time investor, you are better off keeping your investment and insurance products separate. 

Surrendering ULIP policy

If you surrender your policy after the lock-in period of 5 years, the surrender value will be added to the gross total income of that year and become taxable as per the current slab. For example, if ULIP’s surrender value is Rs. 2,00,000 and the total income apart from surrender value is Rs. 10,00,000, then the total taxable income will become Rs 12,00,000, and the entire income will be taxed as per the prevailing tax slabs.

But, if you surrender the policy after the lock-in period of five years, then the surrender value becomes tax-free, and you become eligible for tax benefit. So, if you are wondering about the income tax on ULIP surrender, then you must complete the lock-in period for your surrender value to be tax-free.  

Despite the latest changes in the ULIP tax landscape, it still remains one of the most sought after investment instruments due to its many benefits. According to reputed insurance providers, a comprehensive ULIP plan will help you secure your family’s finances and also help you create wealth. But make sure you carefully assess the policy’s benefits and features before investing in a ULIP plan.