Unit Linked Insurance Plans (ULIPs) combine life cover with market-linked investment returns. Besides these twin advantages, ULIPs also offer tax-saving potential.
However, after the Finance Act of 2021, ULIP taxation rules have changed—especially for premium payments that exceed Rs. 2.5 lakh per annum.Understanding how these new rules apply is vital if you’re investing large sums in a ULIP. It can also help you avoid surprises at maturity, particularly if you’re relying on the ULIP for tax-free long-term capital growth.
Section 80C deductions on ULIP premiums
ULIP premiums qualify for tax deductions under Section 80C of the Income Tax Act. You can claim up to Rs. 1.5 lakh annually, but only if the premium is within specified limits:
- For plans issued before 1 April 2012: You can claim deductions if your premium is up to 20% of the sum assured.
- For plans issued after 1 April 2012: The premium should not exceed 10% of the sum assured.
For instance, if your ULIP sum assured is Rs. 10 lakh and the policy was issued in 2014, then a maximum premium of Rs. 1 lakh is eligible for deduction under Section 80C.
Tax implications under Section 10(10D)
Until February 2021, all maturity proceeds from ULIPs were tax-free under Section 10(10D), regardless of premium amount. But the Finance Act 2021 introduced a crucial change: if your annual premium exceeds Rs. 2.5 lakh for a policy issued on or after 1 February 2021, the maturity proceeds will be taxable.
This threshold is not just for individual policies. If you hold multiple ULIPs and the combined premium crosses Rs. 2.5 lakh in any financial year, the maturity amounts of all such policies may be subject to tax.
How ULIP maturity is taxed when premium exceeds Rs. 2.5 lakh
When a ULIP exceeds the Rs. 2.5 lakh annual premium cap, the maturity proceeds will be taxed as Long Term Capital Gains (LTCG) if held for more than 12 months. LTCG above Rs. 1 lakh is taxed at 10%.
If the holding period is under 12 months, the gains are considered Short Term Capital Gains (STCG) and taxed at 15%.
This taxation only applies to the gains—i.e., the difference between the total premiums paid and the maturity amount. The premium amount itself is not taxed.
Case of multiple ULIPs
Suppose you own three ULIPs—one with a premium of Rs. 1.5 lakh, the second with Rs. 1 lakh, and the third with Rs. 3 lakh. The total premium paid across policies is Rs. 5.5 lakh, which exceeds the Rs. 2.5 lakh cap. In this scenario, the maturity proceeds of the third policy will be taxed, but the first two may remain tax-free depending on how the total premium is spread.
Death benefit remains tax-free
Despite these changes in maturity taxation, the life insurance component remains untouched. The death cover paid to nominees continues to be tax-exempt under Section 10(10D), regardless of how much premium was paid.
Don’t ignore ULIP plan charges
In addition to taxes, ULIP plan charges also impact your returns. These include:
- Fund management fees
- Mortality charges
- Policy administration fees
- Surrender charges (if you exit early)
Even with favourable tax treatment, these charges can reduce the actual return on your investment. For higher premiums, it’s crucial to calculate the impact of these fees along with taxation. Use a ULIP calculator or consult a financial advisor for clarity.
Conclusion
ULIPs continue to offer a balanced mix of life cover and market-based returns. But if you are investing more than Rs. 2.5 lakh annually, the taxation rules become stricter under the Finance Act 2021. Your maturity proceeds may attract capital gains tax, though death benefits remain exempt. Understanding ULIP taxation rules and comparing them with ULIP plan charges can help you make an informed decision and optimise both your tax savings and long-term returns.
