Is Maturity Amount of ULIP Taxable?

A Unit Linked Insurance Plan is a hybrid product which offers two benefits of life insurance coverage and investment in the capital market. The premium paid towards the ULIP scheme is divided into two parts. The first part is utilized for providing the life coverage of the policyholder whereas the other larger part is invested in the capital funds. This portion of the premium can be invested in shares, debt funds or a mix of both based on the risk appetite and interest of the investor.

Tax implications on the ULIP Maturity Benefits

Before Purchasing a ULIP policy, it is significant to know the terms and conditions of the plan. Similarly it is also recommended to know the pros and cons of the plan. Tax implications are one such important aspect that requires your attention. In this article, let us discuss more on the tax implications on the ULIP Maturity Benefits.

The finance bill 2021 proposed to tax certain ULIPs. The tax exemptions under Section 10(10D) of the Income Tax, 1961, were withdrawn and such plans are taxed under Section 112A of the Act. 

Details on the Exemptions allowed under Section 10(10D) for the sum received under Unit Linked Insurance Plan( Before the Budget 2021)

Prior to the Budget 2021, section 10(10D) provided for a tax exemption on any sum received under ULIP, including the bonus accumulated on such policy. However, no exemption under this section is applicable, if the amount of  premium payable in any year during the policy tenure exceeds 10% of the actual capital sum assured. 

 Exemptions allowed under Section 10(10 D) for the sum received under ULIP( after the budget 2021)

The new bill proposed that there wouldn't be any tax exemption under Section 10(10D) available to the ULIPs issued on or after 1st February 2021, if the premium payable for any of the previous year during the policy tenure exceeds Rs. 2,50,000. Moreover, if a person pays premium to more than one ULIP, the exemption shall be applicable to only those policies whose total premium doesn't exceed Rs. 2,50,000, for any of the previous years during the policy tenure. 

*  The new Taxation rules applicable to those ULIPs which are issued on or after 01-02-2021. 

The Finance Bill, 2021 inserted Fourth and Fifth Proviso to section 10(10D) -

• The Fourth proviso acknowledges that there wouldn't be any exemption available for a policy which is acquired on or after 01-02-2021, if the premium paid in any year during the tenure of the ULIP exceeds 2,50,000 for a single policy.
• The Fifth Proviso entitles for an exemption for all the policies whose aggregate( total of all the policies taken) premium in any year during the tenure of the policies is within the limit of 2,50,000. Therefore it implies that exemption would be allowed to the low premium ULIPs, if the aggregate of which is below Rs. 2.5 Lakhs.
• In case of the demise of the policyholder, tax should be paid if the premium exceeds 10% of the sum as or if the premium is more than 
  Rs. 2, 50,00 . There wouldn't be any tax exemptions in such a case.

Conclusion 

So the financial budget 2021 introduced the following amendments to balance the tax benefits of ULIPs with that of mutual funds. Even after the budget, the ULIPs still enjoy certain tax exemptions.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.