Are ULIP returns taxable

Looking for a way to invest in a good life insurance and harness capital growth. Pooja decided to opt for a ULIP plan. After speaking with friends, she chose a single premium ULIP in 2019. The ULIP will mature in March 2024. Pooja is quite happy with her decision as her NAV shows a profit but at the same time she is also wondering if she will be taxed on the returns.

This is a very valid concern especially when ULIPs come to the end of their 5 year term. On the one hand policy holders, like Pooja get a good return on the other hand they worry about tax complications.

What is a ULIP ?

ULIP (Unit Linked Insurance Plan) is an insurance plan that offers the dual benefit of investment to fulfil your long-term goals, and a life cover` to financially protect your family in case of an unfortunate event. The premium paid towards a ULIP is divided into two parts. A part of it is contributed to your life cover`, and the remaining is invested in the fund of your choice. You can choose to invest in equity, debt, or a combination of both funds as per your risk appetite and goals. This makes ULIPs an ideal investment option for you and your family’s long-term goals.

ULIPs come with a lock-in of 5 years which can help you inculcate a habit of disciplined investing. Tax-saving funds have historically given double digit returns, but you need to look for a new fund every year, for one-time investment. With ULIPs, you can invest, decide on the equity and debt mix and let it

Tax benefits of ULIPs:

One of the reasons people like Pooja choose ULIPs is their tax saving benefit and capital growth. The different ways you can save tax with ULIPs:

  • 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: Upon the completion of the tenure of your ULIP, the total amount received by you or your nominee will be completely exempted from tax under section 10(10D). But the tax benefits can only be availed if the conditions stated in Sec10(10D) of Income Tax Act 1961 are fulfilled in respect of insurance premiums. The Finance Act, 2021, introduced certain provisions through amendments to Section 10(10D) and the applicability is from February 1, 2021. As per these changes, certain ULIP plans will no longer have exemptions:
  • The policies are issued on or after February 1, 2021, and
  • In case you have paid an insurance premium exceeding of Rs 2.5 lakhs for any of the previous years, then the amount received (including the bonus) at the time of maturity will be taxable, or
  • In case an individual has purchased multiple ULIP plans and the aggregate amount paid is more than Rs 2.5 lakh, then it comes under the ambit of taxation
  • Thus, it seems Pooja is eligible for tax free returns since she invested before 2021. Otherwise she would have to also check that her premium is less than Rs. 2.5 lakh
  • Death Benefit: If the policyholder dies, the death benefit payout is also tax-free. Death benefit paid under the ULIP is completely tax free. In this respect, the ULIP resembles a traditional life plan offering assured financial protection to the family of the insured. Of course, the payout can be higher than the  sum assured  depending on the returns generated by the unit-linked investments.
  • Partial Withdrawals: After the five year lock-in period ends, you are permitted to make partial withdrawals. Before withdrawing you should check if your insurer levies charges on partial withdrawal (most insurers do). Plus, there are some more rules:
  • You can make partial withdrawals only up to three times after the lock-in period.
  • In addition, the amount you are taking out should not exceed 25% of the fund value.
  • However, you should ensure that after extraction of the required amount, the remaining fund value should still be three times the annual premiums. On the contrary, some policies have conditions that leftover fund value should be equal to annual premiums.According to Section 10(10D) of the Income Tax Act 1961, you will not have to pay any additional tax during partial withdrawals provided you are eligible for the exemption under Income Tax rules.
Conclusion

We all want a little more in life- more security, more comforts and more returns. Same is true for our investments like the Unit Linked Investment plans which us the additional security along with capital growth and tax savings. Future Generali Big Dreams Plan, is a comprehensive Unit Linked Insurance Plan, that lets you create wealth while enjoying the benefits of an insurance plan at the same time. To understand which plan works best for your particular needs & how, you can visit our website or talk to our trusted and experienced advisors.