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ULIP Taxation: Complete Guide to Tax Benefits, Charges & Rules

TeamAckoJan 18, 2024

ULIPs, or Unit-Linked Insurance Plans, provide both life insurance and investment options. They are favoured by individuals seeking financial security for their loved ones and capital growth. In this article, we'll break down the key points related to their taxation that you should be aware of.




What is ULIP?

ULIP stands for Unit-Linked Insurance Plan. This is a financial product that combines the benefits of life insurance with the potential for market-based returns. When you buy a ULIP, you're essentially getting:

  • Life Insurance Cover: A sum assured is payable to your nominee in case of your death.

  • Investment Profile: Options to invest in various types of funds like Equity Fund, debt funds or balanced funds based on your risk appetite.

Key Features of ULIPs

ULIPs are versatile, offering a range of features that make them a sound investment choice:

  • Investment Choices: ULIPs offer a variety of fund options. Whether you're a risk-taker aiming for high returns in the stock market or someone who prefers stable income sources like bonds, there's a fund for you.

  • Life Cover: The life insurance cover ensures that your loved ones are financially secure in the unfortunate event of your death.

  • Flexibility: You can switch between funds, make partial withdrawals, and choose your premium amounts. This adaptability makes ULIPs suitable for varying financial goals and market conditions.

Tax Benefits of ULIPs

One of the standout features of ULIPs is the tax benefits they offer. Here's how you can save:

  • Premium Payable: The annual premiums you pay are eligible for income tax deductions under Section 80C. You can claim up to Rs 1.5 lakh per year, reducing your taxable income.

  • Maturity Benefits: When the policy term ends, the maturity proceeds you receive are exempt from tax under Section 10(10D), provided certain conditions are met.

  • Death Benefit: If the policyholder dies, the death benefit payout is also tax-free.

ULIP Taxation Rules and Implications

Understanding the taxation rules for ULIPs is crucial for maximising returns. The premiums paid are eligible for tax deductions under Section 80C of the Income Tax Act. This can reduce your taxable income by up to Rs 1.5 lakh per year. However, to avail these benefits, the premium amounts should not exceed 10% of the sum assured.

  • Maturity Taxability: If the premium stays within the 10% limit, the maturity proceeds are tax-free under Section 10(10D).

  • Death Benefit: In the unfortunate event of death, the death benefit payout is also exempt from tax.

  • Partial Withdrawals: After the five-year lock-in period, any partial withdrawals are tax-free.

It's worth noting that tax rules can change. Consulting a financial advisor for the most current rules is advisable.

ULIP Charges and Fees

When investing in ULIPs, it‘s important to be aware of the various charges. These can include mortality charges for the life insurance cover and fund management fees for handling your investments.

  • Mortality Charges: These are fees for the life insurance cover provided.

  • Fund Management Fees: These are charges by the insurance company for managing your fund portfolio.

  • Surrender Charges: If you decide to exit the plan before the lock-in period ends, a surrender charge may apply.

Being aware of these charges can help you make an informed decision. Always read the fine print and consult your financial advisor for a suitable plan that aligns with your life goals and finances.

The Lock-in Period and Withdrawals in ULIPs

ULIPs come with a minimum lock-in period of five years. This means you can't withdraw your investment before this period without incurring surrender charges.

  • Five-Year Lock-in: This period allows your investment to grow while providing you with life insurance cover.

  • Withdrawals: After the lock-in period, you can make partial withdrawals tax-free, offering liquidity for any immediate financial needs.

  • Surrender: If you decide to exit the plan before the lock-in period ends, you'll incur a surrender charge and the remaining capital may be subject to taxation rules.

The lock-in period for long-term investments can lead to significant gains. Consult a financial advisor to understand the tax implications and charges for early withdrawals or surrender.

Switching and Fund Management Charges in ULIPs

ULIPs offer the flexibility to switch between different types of funds. This feature is beneficial for adapting to market conditions and aligning with your investment profile. Nevertheless, it is important to comprehend the related fees.

  • Switching Charges: These are fees for moving your capital between different types of funds within the ULIP. The charges may vary depending on the insurance company and the specific ULIP plan option.

  • Fund Management Charges: These are fees that the insurance company charges for managing your investment. They are deducted from the fund value and are not eligible for tax benefits.

Tax Planning Strategies with ULIPs

ULIPs offer various avenues for tax planning. They not only provide tax benefits under Section 80C but also offer tax-free maturity under Section 10(10D). Here are some strategies to optimise your tax planning:

  • Maximise Section 80C Benefits: Make sure to maximise the premium of Rs 1.5 lakh under Section 80C for income tax deductions. This can significantly reduce your annual income that is subject to tax.

  • Tax-Free Maturity: To ensure the exemption of tax on maturity proceeds, keep the premium within 10% of the sum assured. This will make the maturity amount and any death benefit completely tax-free.

  • Fund Switching: Use the fund-switching option to move to funds that offer better tax efficiency, especially during market volatility.

Wrapping up!

Investing in ULIPs is not just about growing your capital; it's also about securing your and your family's financial future. ULIPs are considered a reliable financial planning tool due to their tax benefits and flexibility. It is advisable to consult with a qualified financial advisor to fully use the potential of this investment opportunity.

Frequently Asked Questions (FAQs)

Below are some of the frequently asked questions on ULIP Taxation


Are the premiums paid towards ULIPs eligible for tax deductions?

ULIP premiums are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.

Are the maturity proceeds from ULIPs taxable?

The maturity proceeds received from ULIPs are exempt from taxes under Section 10(10D) of the Income Tax Act.

Are the death benefits received from ULIPs taxable?

No, the death benefits received from ULIPs are also tax-free under Section 10(10D) of the Income Tax Act.

Can I switch between funds within a ULIP without incurring any tax liability?

Yes, switching between funds within a ULIP does not attract any tax liability.

What is the maximum amount of premium that can be claimed for tax deductions under Section 80C?

The maximum amount of premium that can be claimed for tax deductions under Section 80C is Rs.1,50,000 per year.

Is there any tax liability on ULIP maturity proceeds if the premium exceeds a certain limit?

Yes, if the premium paid towards ULIPs exceeds Rs.2.5 lakh, then the returns that you get will be taxed.

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.


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