How are ULIPs taxed at maturity?

Investments can be the most challenging yet crucial part of your financial planning. Due to the fear of risks associated with investments, many of you might ignore the benefits of investment vehicles. The right investment product can allow you to build a substantial corpus, generate relatively high returns, as well as reduce your tax liability. While there are many investment tools in the market that can offer these benefits separately, a Unit Linked Insurance Plan (ULIP) can club all the benefits under a single integrated plan. One of the major advantages offered by a ULIP policy is its tax benefits.

Under a ULIP policy, you can claim tax deductions on the premium as well as maturity proceeds. While the premium can be paid in return for the life cover, the maturity proceeds can protect the financial needs of your loved ones in your absence. Since a ULIP policy falls under the Exempt- Exempt- Exempt (EEE) category, the premium and maturity proceeds can be exempted from taxes. Let’s go through the tax benefits applicable to the premium and maturity proceeds in accordance with Section 80C and Section 10(10D) of the Income Tax Act, 1961 as mentioned below:

  1. Premium

According to Section 80C, you can be eligible to claim a deduction up to Rs. 1,50,000 on your taxable income.

  1. Maturity benefit

After the ULIP policy matures, you can receive a maturity payout. The amount granted on the maturity date can be tax-free in accordance with Section 10(10D).

While the tax exemptions of the premium can be straightforward, the applicable ULIP benefits on the maturity proceeds can be quiet complex. If you wish to claim deductions on the maturity proceeds, you should fulfill the following conditions as given below:

  • When you purchase a ULIP policy before 1st April 2012

If the premium value is above 10% of the total sum assured value, you can claim a deduction that can be equal to 10% of the total sum assured value.

  • When you purchase a ULIP policy after 1st April 2012

If the premium value is above 20% of the total sum assured value, you can claim a deduction that can be equal to 20% of the total sum assured value.

NOTE: If the premium value is more than the percentage provided under your ULIP policy, the whole maturity amount can be added to your income in the year during which the ULIP policy has been surrendered.

As a policyholder, you should be able to identify the amount on which tax deductions are applicable. The income tax department has laid down guidelines, which state ‘any amount paid to keep in force.’ With these guidelines, you can understand that your ULIP policy can be applicable for tax deductions. Hence, you should include service tax and other applicable charges at the time of deduction.

Typically, a ULIP policy should be kept in force for a duration of five years to receive tax benefits. If you continue the ULIP policy until the lock-in period, you should pay the premiums regularly based on the premium payment mode. As a policyholder, you can make the premium payment quarterly, monthly, half-yearly, or annually. There can be times when you might want to surrender the ULIP policy when you might be unable to afford the premium amount. If you discontinue the ULIP policy before the lock-in period, you might not be able to make the most of the tax benefits. In addition to this, if your insurer had allowed any deduction in the previous year, it can get added to your income after the ULIP policy is terminated.

To conclude, a ULIP investment not only helps you to save more tax as well as charges you minimally. However, see to it that you do not get lured by tax benefits and low premiums. Choose the right ULIP policy based on your financial requirements and risk appetite. Moreover, stay invested for a long time to reap maximum tax benefits over the due course of the ULIP policy.

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