The popularity of a ULIPs exists because of it’s dual-natured benefits. The amount you invest in a ULIP gets divided in two parts – one pays for the life cover, and the remaining is invested in the fund you choose. ULIP offers debt, equity, or a combination of both funds. Your choice depends on your premium affordability, risk appetite and future goals.
Is There Tax On ULIPs?
One of ULIP’s winning features is the ULIP tax deduction structure, which helps you save on taxes!
- Get tax deductions on annual premiums of up to Rs 1.5 lakh/year with Section 80C of Income-tax Act, 1961 (Act).
- At policy maturity, you enjoy tax-free proceeds under Section 10(10D) of the Act.
- Even the death benefit payout is tax-free.
These tax-saving benefits translate to more savings for you, which you can further reinvest to earn more dividends. However, some tax is still levied, depending on the year of purchase and total premium payable.
Types Of Taxes Applicable And Eligible Deductions For ULIPs
You can claim deductions on your premiums paid under Section 80C, and ULIP maturity taxability deduction under Section 10(10D) of Act, subject to the following conditions:
For ULIPs purchased before April 1, 2012
- If the premium amount is less than 20% of the actual capital sum assured, you benefit from deduction of the total annual premium paid under Section 80C.
- If the premium exceeds 20% of the actual capital sum assured, you claim a deduction on the amount equal to 20% of the actual capital sum assured.
For ULIPs purchased after April 1, 2012
- Deduction on total annual premiums paid under Section 80C can only be claimed if the premium amount is less than 10% of the actual capital sum assured.
- If the premium exceeds 10% of the actual capital sum assured, you can avail a deduction on the amount equal to 10% of the actual capital sum assured.
Maturity benefits for ULIPs purchased before February 1, 2021
Maturity benefits are tax-free under Section 10(10D of the Act), if
- For ULIPs purchased before April 1, 2012 - the premium amount is less than 20% of the actual capital sum assured
- For ULIPs purchased after April 1, 2012 - the premium amount is less than 10% of the actual capital sum assured
Update on Taxation on ULIP’s Issued After February 1, 2021
An exemption under section 10(10D) of the Act shall not apply for ULIP policies (Non-Exempt ULIP) issued on or after 1 February, 2021, if the amount of premium payable for single/in aggregate for any of the previous year during the term of the policy exceeds INR 2,50,000. Such Non-Exempt ULIPs’ are considered as “Capital Asset” under section 2(14) of the Act.
Any gains arising from Non-Exempt ULIP shall be taxable as “Capital Gains” following the computation mechanism prescribed under the relevant provisions of the Act.
The existing condition of premium amount should not be more that 10% of capital sum assured to avail the exemption under section 10(10D) of the Act.
The lumpsum received as death benefit is tax-free under Section 10(10D) of Act.
Update as per Union Budget 2025
The Union Budget for FY 2025-26 was presented on February 1, 2025. Finance Minister Nirmala Sitharaman introduced changes to the taxation of Unit Linked Insurance Plans (ULIPs). Effective from April 1, 2026, ULIPs with annual premiums exceeding ₹2.5 lakh will be subject to long-term capital gains (LTCG) tax at a rate of 12.5% if held for more than one year.
1. Taxation on High-Premium ULIPs:
ULIPs purchased after February 1, 2021, with annual premiums exceeding ₹2.5 lakh, will no longer enjoy tax exemption under Section 10(10D) of the Income Tax Act. Instead, gains from these policies will be taxed as capital gains upon redemption.
2. Capital Gains Tax Rates:
Long-Term Capital Gains (LTCG):
For policies held for more than 12 months, gains will be taxed at 12.5%. This reduced rate on long-term holdings signals a nuanced approach to encourage investors to maintain a long-term perspective on their investments. By doing so, the government is also promoting long-term economic stability and investment in financial products that contribute to sustained financial growth.
Short-Term Capital Gains (STCG):
For policies held for 12 months or less, gains will be taxed at 20%. The higher rate for short-term gains indicates an effort to dissuade speculative investments and encourage investors to hold onto their investments for longer periods. This structure is in line with the broader objective of reducing market volatility by discouraging frequent trading.
Strategic Considerations for managing ULIPs in 2025 and beyond
Investors holding high-premium ULIPs should reassess their portfolios and consider the tax implications of their investment strategies. Investors should also look at ULIPs from a perspective of wealth-creation and security, for better portfolio management and long-term investment planning.
The following steps can be implemented to fit ULIP into a successful financial portfolio:
1. Policy Evaluation
Review existing ULIP holdings. Determine if the annual premium exceeds the ₹2.5 lakh threshold and understand the potential tax liabilities upon redemption. Investors must be proactive in assessing which policies may now incur additional taxes. They should consider whether these policies remain beneficial within their overall financial plans.
2. Horizon-based Planning
Given the new tax structure, a longer investment horizon may be beneficial to optimize post-tax returns, especially considering the LTCG tax rate of 12.5% for holdings beyond one year. Investors may need to recalibrate their investment timelines to align with these changes. They should ensure that their investment strategies remain in line with their financial goals and the new taxation landscape. A ULIP calculator can be used to analyse and plan investments and timelines in advance.
3. Diversification
Explore a diversified investment approach. Balance ULIPs with other financial instruments to achieve financial goals while managing tax liabilities effectively. Diversification remains a prudent strategy in managing risk and achieving a balanced portfolio in light of these fiscal changes.
Tips to manage ULIP taxation
Clearly, under the right conditions, ULIPs offers tax benefits. Here’s how you can leverage them to optimise your tax planning:
Save your taxable income:
Aim for the ₹1.5 lakh premium limit as this will give you higher tax benefits and higher life coverage. For example, paying a premium of ₹1 lakh will lower your taxable income by ₹1 lakh.
Get more on maturity:
Avoid tax on ULIP maturity benefits and death benefits by keeping the annual premium value within ₹2.5 lakh .
Stay invested for at least 5 years:
To avail ULIP tax benefits under section 80C, stay invested for 5 years. Otherwise, the deduction availed in the previous year is added back to your taxable income.
Leverage market volatility:
Switch funds to one that offers better tax efficiency.
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