Understanding the Taxability of ULIP on Maturity      

Think of a financial product that not only protects your future but also grows your wealth—sounds like the perfect deal, right? Unit Linked Insurance Plans (ULIPs) do just that by combining insurance and investment in a single product. But beyond their dual benefits, understanding how these plans are taxed on maturity is crucial to maximising your returns. In this post, we’ll break down the complexities of ULIP plan tax benefits, ensuring you make informed financial decisions.

Breaking Down the Taxability of ULIP on Maturity

The ULIP scheme offers multiple tax advantages, from deductions on premiums to exemptions on maturity proceeds. However, recent tax amendments have introduced new conditions for tax-free benefits.

1. Tax Benefits on Premiums

Under Section 80C of the Income Tax Act, policyholders can claim deductions of up to INR 1.5 lakh per annum on ULIP premiums. However, for policies issued after April 1, 2012, the premium should not exceed 10% of the sum assured to qualify for this deduction. If the ULIP was purchased before this date, the limit extends to 20% of the sum assured.

Additionally, ULIP holders can invest in pension ULIPs, which qualify for tax deductions under Section 80CCC. This also falls under the INR 1.5 lakh deduction limit. Furthermore, if a policyholder opts for critical illness or health riders with their ULIP scheme, they may claim additional deductions under Section 80D, up to INR 25,000 (INR 50,000 for senior citizens).

2. Taxation of ULIP Maturity Proceeds

Earlier, all ULIP scheme maturity proceeds were tax-free under Section 10(10D). However, the Finance Act 2021 introduced a new provision where the ULIP plan tax benefit on maturity is only applicable if the total annual premium across all ULIPs does not exceed INR 2.5 lakh.

Here’s how it works:

• If the total annual premium is less than INR 2.5 lakh, the maturity proceeds remain tax-free.
• If the annual premium is more than INR 2.5 lakh, the maturity proceeds are taxed as capital gains—either long-term capital gains (LTCG) at 10% beyond INR 1 lakh or short-term capital gains (STCG) at 15%.

3. Capital Gains Tax on ULIPs

If the premium for any ULIP scheme crosses INR 2.5 lakh in any year, the policy is treated as an investment rather than an insurance product. The taxation then follows the same rules as equity-oriented investments.

• LTCG (more than 12 months holding) – 10% on gains above INR 1 lakh
• STCG (less than 12 months holding) – 15% on total gains

Let’s take an example of two individuals, Rahul and Ananya, who purchased Aviva Signature Investment Plan ULIPs at the same time but made different financial decisions.

• Rahul’s ULIP Plan:
  • Annual premium: INR 2 lakh
  • Sum Assured: INR 20 lakh
  • Total Maturity Amount after 10 years: INR 30 lakh
• Ananya’s ULIP Plan:
  • Annual premium: INR 3 lakh
  • Sum Assured: INR 30 lakh
  • Total Maturity Amount after 10 years: INR 45 lakh

Since Rahul’s annual premium was below INR 2.5 lakh, his ULIP plan tax benefit remains intact, and his maturity proceeds are completely tax-free under Section 10(10D).

However, Ananya’s ULIP exceeded INR 2.5 lakh in annual premiums, making her maturity proceeds taxable. Her taxable amount is:

• INR 45 lakh (Maturity amount) – INR 30 lakh (Premiums paid) = INR 15 lakh gains
• Tax liability: INR 1.4 lakh (10% LTCG on INR 14 lakh after INR 1 lakh exemption)

If Ananya had planned her investment differently and kept her annual premium under INR 2.5 lakh, she could have saved INR 1.4 lakh in taxes.

What Happens in Case of Death Benefit?

Regardless of the premium paid, the death benefit received by the nominee is completely tax-free under Section 10(10D). This makes ULIP schemes a reliable financial safety net for dependents.

Key Considerations Before Investing in ULIPs

Before opting for a ULIP scheme, consider these key factors to optimise tax benefits:

• Keep your annual premium below INR 2.5 lakh to ensure tax-free maturity benefits.
• Understand the different fund options within ULIPs and their tax implications.
• If your annual premium exceeds INR 2.5 lakh, plan for capital gains tax liabilities.
• Remember that switching between ULIP funds is tax-free, allowing portfolio adjustments without tax consequences.
• Consider the lock-in period of 5 years before making premature withdrawals.
• Always review charges such as fund management fees, mortality charges, and administrative fees before investing.
• If you are planning long-term wealth creation, evaluate the potential growth of ULIPs compared to other market-linked instruments like mutual funds.

Conclusion: A Smarter Way to Save & Invest

A ULIP scheme is a versatile financial tool that helps you grow wealth while ensuring financial protection. With the right tax planning, you can maximise your ULIP plan tax benefit, ensuring your investment remains efficient and rewarding.

By understanding the taxability of ULIPs, you can make strategic investment choices and build a financially secure future. Take control of your financial goals today, plan your investments wisely, and ensure you are getting the most out of your ULIP.

If you’re looking for a ULIP plan that aligns with your financial goals, explore the range of ULIP schemes offered by brands like Aviva India. With a well-planned approach, you can enjoy both investment growth and tax savings, making ULIPs one of the smartest choices for wealth creation.

*Standard T&C Apply

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply

*Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.

*Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.