Financial security is extremely important nowadays. People invest in various options to achieve stability. At the same time, buying an insurance policy offers security to your loved ones during tough times. But what if you could get both benefits through one investment? Unit Linked Insurance Plans (ULIPs) have emerged as a popular option. These plans provide both insurance and investment, making it a complete financial product for long-term planning. Additionally, you should be aware of the taxability of ULIP for better management of your finances.
What Is a ULIP Scheme?
Before jumping into the taxability, it’s important to first know what a ULIP scheme is. A ULIP is a special financial product that merges life insurance with investment. The amount of premium you pay towards a ULIP is split into two components: one part is paid for your life insurance, and the rest is invested in different market instruments like equity, debt, or a combination of both. This dual purpose makes ULIPs a sought-after investment option for investors seeking insurance coverage and growth prospects. With time, the tax advantages of ULIPs have increased their popularity, particularly among long-term investors.
Tax Benefits Under Section 80C for ULIPs
One of the most popular aspects of such schemes is the tax relief under Section 80C of the Income Tax Act. The premiums paid on a ULIP are eligible for deductions up to ₹1.5 lakh annually. This deduction comes under the umbrella of Section 80C, which also involves other investment media such as Provident Funds (PFs), Public Provident Funds (PPFs), and National Savings Certificates (NSCs). However, to qualify for the purpose of this tax deduction, the amount assured under the ULIP should be not less than 10 times the annual premium.
For example, if your annual premium is ₹1 lakh, the sum assured must be ₹10 lakh or more. This ensures that the plan serves as a genuine life insurance product in addition to being an investment vehicle. It’s important to note that the premium paid for ULIPs can only be deducted under Section 80C if the policyholder is the life insured or the beneficiary under the policy. This is a general stipulation for every life insurance plan to prevent misappropriation of tax relief.
Taxation of ULIP Maturity Amounts
There are tremendous advantages to investors from the taxability of ULIP maturity amounts. As per Section 10(10D) of the Income Tax Act, the maturity of ULIPs is exempt, subject to a condition that the sum assured amount is 10 times the amount of the premium payable per year. This implies that if your policy meets this requirement, you will be exempt from paying tax on the returns earned from your ULIP investment. But if the sum assured is lower than 10 times the annual premium, the ULIP scheme will be non-taxable and the maturity proceeds may be taxable as capital gains. The tax treatment would depend on the duration of the investment, i.e., whether it is classified as short-term or long-term.
Capital Gains Tax on ULIPs
The taxability of ULIP also applies to the capital gains realised on the investments made under the policy. The taxability of these capital gains is determined by the holding period of the ULIP. There are two categories of capital gains under the Income Tax Act: short-term and long-term.
- Short-Term Capital Gains (STCG): If the ULIP units are redeemed within three years from date of purchase, the returns would be short-term capital gains. Short-term capital gains are presently taxed at 15% as per the current tax regulations.
- Long-Term Capital Gains (LTCG): If the units are being held for a period exceeding three years, the returns qualify as long-term capital gains. Under the current tax rules, long-term capital gains on ULIPs are exempt from tax, which makes ULIPs a popular choice for long-term investors who want to maximise their wealth in the long run.
ULIP Taxation in 2025: What’s Changing?
There are expected to be some tax changes in the ULIPs in 2025. Although the government has not made any significant updates to the tax-free nature of ULIP maturity proceeds, tighter regulations may be implemented for the tax-free status of ULIP schemes with a reduced sum assured.
Specifically, policymakers are considering reducing the 10-times premium requirement so that ULIPs become more insurance-oriented rather than investment-oriented. This is an attempt to check the misuse of the tax benefits by policyholders who invest in ULIPs solely for investment. These reform measures could impact the taxation of ULIPs and may prompt investors to rethink their strategies.
It’s crucial for ULIP investors to monitor potential changes in tax laws and how they may impact the taxability of ULIP benefits.
How to Maximise ULIP Tax Benefits
To maximise the tax benefits of ULIPs, investors should follow these tips:
- Invest for the Long Term: Since long-term capital gains from ULIPs are tax-free, it’s advisable to invest in ULIPs for a long period to benefit from tax exemptions on returns.
- Select the Appropriate ULIP Scheme: While buying a ULIP, make sure the sum assured is of not less than 10 times of the annual premium to get tax-free maturity proceeds. Also, select a ULIP scheme as per your risk appetite, if you are fond of taking equity or debt-oriented investments.
- Track Your Investment: Though ULIPs are meant for long-term growth, it’s important to keep a track of your investments’ performance over time. This will help you make sensible decisions about the distribution of money among asset classes.
- Review the Tax Laws: With potential changes in tax laws in 2025, keeping oneself informed about new regulations that may impact taxation of ULIPs is important. It can be ensured that you get the best out of the tax benefits by consulting a tax professional.
Conclusion
Taxability of ULIP is a matter to consider for anyone intending to invest in a ULIP. These products offer a unique combination of life insurance coverage and investment opportunities, making them a good choice for investors. If investors are aware of the taxation rules, such as the tax benefits under Section 80C and the tax-free maturity proceeds, they can maximise their ULIP investments. Although ULIPs have great tax benefits, one needs to be cautious about possible changes in tax laws, particularly as 2025 is near. By being updated and investing properly, one can make sure that their ULIPs are not just providing financial security but also long-term tax benefits.
