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The reintroduction of LTCG (Long Term Capital Gains) Tax in Budget 2018 brought back the Unit Linked Insurance Plans (ULIPs) versus Mutual Funds (MF) debate from the dead. Given the imposition of 10% LTCG tax on equity-oriented mutual fund schemes, it’s no wonder why ULIPs suddenly have become the go-to investment options for investors across the country.

But here’s the deal: more than 20 million investors prefer investing their hard-earned money in mutual fund schemes despite the imposition of 10% LTCG tax, according to a study by AMFI. This is because a large majority of investors do not understand the nuances of taxation on ULIPs.

In this post, we’ll reveal everything you need to know about the tax exemptions and implications of ULIPs. If you’re a new and inexperienced investor, you’re going to love this post. And if you’re a pro-investor, we’ll show you how to make the most of your ULIP investments.

So without further ado, let’s get started!

Tax Exemption on ULIPs

  • On Premium Payment - ULIPs are essentially insurance products. Therefore, the premiums paid for ULIP plans are eligible for tax deduction under Section 80C of the Indian Income Tax Act. The maximum tax exemption under Section 80C is subject to a maximum amount of Rs.150000.
  • On Maturity Benefits – In addition to the tax exemption on the premium payment, maturity benefits under ULIP plans are also tax exempt. This exemption can be claimed under Section 10(10D) of the Indian Income Tax Act. 
  • On Death Benefits – Death Benefits offered under ULIP plans are also eligible for tax exemption. Tax exemption on death benefits can be claimed under Section 10(10D) of the Indian Income Tax Act.

Implications on Tax Exemption on ULIPs

There are certain implications on tax exemptions that an investor must keep in mind before investing in one of the best ULIP plans. Let’s look at what these tax implications actually are.

  • For ULIPs Bought Before April 1st 2012 – Investors who have bought a ULIP plan before the 1st of April 2012 can claim income tax deduction under section 80C if the premium paid is less than 20% of the total sum assured of the policy. In case the premium payment is more than 20% of the total sum assured of the policy, income tax deduction is only allowed on the premium payment amount equal to 20% of the total sum assured.
  • For ULIPs Bought After April 1st 2012 – Investors who have bought a ULIP plan after the 1st of April 2012 can claim income tax deduction under section 80C if the premium paid is less than 10% of the total sum assured. In case the premium payment exceeds 10% of the total sum assured of the policy, income tax deduction is allowed only on the premium amount equal to 10% of the total sum assured.

Amount that Can be Claimed for Tax Deduction

Investors can claim tax deductions on any amount that they need to invest in their chosen ULIP plan in order to keep their plans active. Directives by Income Tax Department clearly states “taxpayers can claim tax benefits on any amount they need to pay to keep their policy in force.” This means investors must claim the entire amount paid by them for tax deductions under Section 80C of the Indian Income Tax Act. One must also include the GST, service taxes and any other charges applicable to the policy.

Implications for Tax Deduction on Discontinued ULIP Plans

In order to claim to tax benefits, investors must continue to pay their premiums regularly for at least 5 years, i.e., the lock-in period of ULIP plans. In the event of discontinuation of the ULIP plan, investors are not allowed to claim any tax benefits under the plan. In addition, any tax deductions availed in the previous policy years also gets added back to the total tax liability in such cases. Therefore, it makes sense to keep the ULIP plan active for at least 5 years from the date of the commencement of the policy.

Tax Benefits on Investment Upon Policy Maturity 

For ULIP plans purchased before April 1st 2012, if the premium paid is less than 20% of the total sum assured of the plan, the benefits offered to the life insured upon the maturity of the policy are tax exempt. Similarly, for ULIP plans purchased after April 1st 2012, if the premium paid is less than 10% of the total sum assured of the plan, the maturity benefits are tax-free. This exemption is provided under Section 10(10D) of the Income Tax Act.

However, if the premium paid for the Plans are more than the percentage detailed above, the entire maturity proceeds becomes taxable and must be reported under the head ‘Income from Other Sources’ when filing income tax returns. In such scenarios, taxes are levied according to the tax slab rates applicable to the investor.

Over to You!

So there you have it - everything that you must know about the tax exemptions and implications under ULIP plans. Remember, knowing everything about tax exemptions and implications can open a window of opportunity for you to save taxes and make the maximum returns on your investments.

Best of Luck!  


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