What Is ULIP Taxation?
ULIP taxation refers to how a Unit Linked Insurance Plan is taxed at different stages of the policy. You may be eligible to claim deductions from your total income while paying the premiums. In addition, maturity proceeds and death benefits may be eligible for favourable tax treatment, subject to the applicable provisions.
It is important to note that taxation on ULIP is subject to various conditions such as the amount of premium paid during the year, the sum assured, and the time of issue of the policy (all discussed later).
Are ULIP Premiums Subject to Deductions?
Whether you can claim a deduction for ULIP premiums depends on the tax regime you choose. If you opt for the old tax regime, eligible ULIP premiums may qualify for a deduction under Section 123 read with Schedule XV of the Income-tax Act, 2025, subject to the prescribed conditions. The maximum deduction available is ₹1,50,000 per annum.
If you opt for the new tax regime, this deduction is generally not available.
Here's a quick summary:
| Tax Regime | Tax Treatment of Eligible ULIP Premiums |
|---|
Old Tax Regime
| May qualify for a deduction under Section 123 read with Schedule XV, subject to the prescribed conditions and limits.
|
New Tax Regime
| Deduction on eligible ULIP premiums is generally not available.
|
How are ULIP Maturity Proceeds Taxed?
The tax treatment of ULIP maturity proceeds depends on when the policy was issued and the annual premium paid. Following the Finance Act, 2021, amendments were made to Section 11 (read with Schedule II, Sr.No.2) (Formerly known as Section 10(10D) of the Income-tax Act, 1961). Under these provisions, the maturity proceeds of ULIPs issued on or after February 1, 2021, may not qualify for tax exemption in the following cases:
- The annual premium exceeds ₹2.5 lakh in any policy year1.
- You hold multiple ULIPs and the aggregate annual premium exceeds ₹2.5 lakh1.
Long Term Capital Gains on Eligible Policies
Maturity proceeds from such ULIPs may be taxed as Long-Term Capital Gains (LTCG). The applicable LTCG tax rate is 12.5%2. However, this does not apply to death benefits, which generally continue to remain tax-exempt under the applicable provisions.
How Are Partial Withdrawals, Surrender and Death Benefits Taxed?
Partial Withdrawals
ULIPs generally allow partial withdrawals after the mandatory lock-in period, subject to the policy terms. The tax treatment of these withdrawals depends on whether the policy satisfies the applicable exemption conditions under the Income-tax Act, 2025. Since the tax implications may vary depending on your policy terms & conditions, it is advisable to consult your tax advisor before making a partial withdrawal.
Surrender of a ULIP
The tax implications of surrendering a ULIP depend on when you surrender the policy and whether it satisfies the applicable exemption conditions. If you surrender your ULIP before the completion of lock-in period, any tax deductions claimed earlier on eligible premiums may be reversed in accordance with the applicable provisions of the Act. Since the tax impact can vary from one policy to another, it is advisable to consult your tax advisor with your policy details.
Death Benefits
Death benefits payable under a ULIP are generally eligible for tax exemption under Section 11 (read with Schedule II, Sr.No.2) of the Income-tax Act, 2025, subject to the applicable provisions. This benefit is generally available irrespective of whether you opt for the old or the new tax regime.
ULIP Taxation: Old Tax Regime Vs New Tax Regime
The table below summarises the key differences in the tax treatment of ULIPs under the old and new tax regimes:
| Particulars | Old Tax Regime | New Tax Regime |
|---|
Tax deduction on eligible ULIP premiums
| May be available under Section 123 read with Schedule XV, subject to the prescribed conditions and limits.
| Generally not available.
|
Tax treatment of eligible maturity proceeds
| May receive favourable tax treatment under Section 11 (read with Schedule II, Sr.No.2), subject to the applicable conditions.
| May continue to receive favourable tax treatment under Section 11 (read with Schedule II, Sr.No.2), subject to the applicable conditions.
|
Death benefits
| Generally eligible for tax exemption under the applicable provisions of the Income-tax Act, 2025.
| Generally eligible for tax exemption under the applicable provisions of the Income-tax Act, 2025.
|
Partial withdrawals and surrender
| Tax treatment depends on the policy terms and the applicable provisions of the Income-tax Act, 2025.
| Tax treatment depends on the policy terms and the applicable provisions of the Income-tax Act, 2025.
|
Summing Up
The tax treatment of a ULIP depends on factors such as the tax regime you choose, the policy issue date and the annual premium payable. While eligible ULIP premiums may qualify for deductions only under the old tax regime, eligible maturity proceeds and death benefits may continue to receive favourable tax treatment, subject to the applicable conditions. Before investing in a ULIP or making decisions such as partial withdrawals or policy surrender, it is advisable to consult your tax advisor to understand the tax implications based on your policy and financial situation.
References
- https://www.indiafilings.com/learn/guidelines-under-section-1010d-of-income-tax-act
- https://www.incometaxindia.gov.in/w/capital-gain
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