(Last Updated On: July 11, 2023)

When making financial plans for the future, you may look for choices that provide many benefits under one roof. A Unit-Linked Insurance Plan, or ULIP, is one such policy that provides both life insurance coverage and potential market-linked investment returns. Depending on the terms and circumstances of the policy, the policyholder may get a payout when a ULIP matures, which might be the total of the invested money plus any returns. However, knowing how a ULIP will be taxed when it matures may be useful to you as an investor.

What is meant by tax benefits on premiums?

A tax deduction of up to Rs 1.5 lakhs may be claimed under Section 80C of the Income Tax Act of 1961 (the Act) against the insurance premiums by the policyholder. Only premiums that do not exceed 20% of the death benefit assured for policies purchased before 1st April 2012 may qualify for Section 80C tax benefits. After 1st April 2012, the premium for such a plan cannot exceed 10% of the guaranteed death benefit.

What is meant by tax benefits on maturity benefits?

According to the current rules for ULIP taxability on maturity, which are outlined in Section 10 (10D) of the Income Tax Act, the sum obtained as maturity earnings from a ULIP may not be taxed as long as certain conditions are met.

Hence, if your ULIP complies with the requirements, you might not need to worry about the taxability of the proceeds upon maturity.

But, you might be asking what conditions and circumstances apply to the ULIP maturity sum being subject to taxation. So, let’s examine this below. 

What do you mean by ULIP taxation on maturity?

Tax exemption, to the uninitiated, may suggest that a specific sum received by the person could be regarded as an income that is not taxable like other sources.

According to Section 10 (10D) of the Income Tax Act of 1961, the maturity earnings from a ULIP might not be regarded as taxable income and will be exempt from taxation. Nonetheless, the plan must adhere to all of the guidelines already established for ULIPs, which are detailed below, for the tax on ULIP maturity proceeds to be exempt.

• If a ULIP is bought after 1st April 2012

When your ULIP insurance was issued may affect whether the maturity amount is taxable and up to what amount. For example, if you bought a ULIP after 1st April 2012 but before 1st February 2021, you might be obliged to keep your premiums under 10% of your death benefit.

Up to a specific amount, the policyholder may be obligated to pay taxes on ULIP maturity proceeds if the premium exceeds 10% of the death benefit assured.

• If a ULIP is bought before 1st April 2012

If the ULIP was purchased before 1st April 2012, the premium might need to be less than 20% of the death benefit guaranteed to qualify for Section 10 (10D) tax exemption.

There may be taxation on ULIP maturity funds for policies bought before 1st April 2012, with a premium of more than 20% of the sum assured.

As previously stated, the two terms and conditions listed above must be followed in order to claim both Section 80C tax deductions and Section 10 (10D) tax exemption.

• ULIP issued after or on 1st February 2021

Suppose the policy was issued on or after 1st February 2021. In that case, the total yearly premium for all policies combined in any given year of the ULIP’s tenure could not exceed Rs 2.5 lakhs in order to qualify for the Section 10 (10D) exemption.

This restriction on the taxes on ULIP maturation may also be applied to policyholders who own numerous ULIPs bought on or after 1st February 2021 and hold them all simultaneously. In that case, the maturity proceeds from any plan(s) with cumulative premiums exceeding Rs 2.5 lakhs for any fiscal year during the policy’s term may be subject to taxation in accordance with the law at the time. The gain from certain policies or plans will be taxed as a capital gain depending on the underlying assets.

Please be aware that Section 10 (10D) of the Act exempts the death benefit payment received by the nominee from taxes. 

What is ULIP taxation? 

ULIPs will be subject to the same long-term capital gains (LTCG) tax as all equity-oriented investments. Moreover, the tax must be paid at a 10% rate in the instance of long-term capital gains (LTCG). Nonetheless, no taxation is levied in the event of a person’s death.

In conclusion, ULIPs provide both investment and life insurance benefits. In addition to assisting you in securing a prosperous future, they also ensure that your loved ones are safeguarded financially in the event of an unforeseen circumstance. You may use a ULIP calculator to understand your approximate returns from the investment.