How does ULIP work?
The amount you invest in 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 payment affordability, risk appetite and future goals.
Is there tax on ULIP?
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, ULIP maturity tax lets 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 ULIP taxation is applicable 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.
Taxation of ULIP
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,If the premium amount is less than 20% of the actual capital sum assured
- For ULIPs purchased after April 1, 2012 if the premium amount is less than 10% of the actual capital sum assured
New regime of 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 would continue to operate;
Death benefit
The lumpsum received as death benefit is tax-free under Section 10(10D) of Act.
Tips to manage ULIP taxation
Clearly, ULIPs offer beneficial tax leeway under Section 80C and tax-free maturity under Section 10(10D). Here’s how you can leverage these to optimise your tax planning:
Save your taxable income: Aim for the Rs 1.5 lakh premium limit as this will give you higher tax benefits and higher life coverage. For example, paying a premium of Rs. 1 lakh will lower your taxable income by Rs. 1 lakh.
Get more on maturity: Avoid tax on ULIP maturity benefits and death benefits by keeping the premium within 10% of the sum assured.
Stay invested for at least 5 years: To avail the tax benefits under section 80C keep them for 5 years. Or else 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.
Tax Savings, higher returns, insurance cover, and more
IndiaFirst Life offers a number of very high return and safe ULIP plans, like IndiaFirst Life Radiance Smart Investment Plan, which assures insurance payout as well as wealth creation.
IndiaFirst Life Wealth Maximizer lets you grow a systematic and exclusive portfolio with multiple investment strategies and flexible options.
The IndiaFirst Money Balance Plan is a ULIP that helps create wealth for the future while limiting your exposure to market fluctuations.
IndiaFirst Smart Save Plan is an endowment money savings plan that offers Life insurance cover, and market-linked returns via four unique fund options tailored to your risk appetite.
ULIPs are an asset to any portfolio. However, there are different product offerings and to find the best fit for your long term goals, risk appetite, and affordability, speak to our financial advisor.
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