Saving in comprehensive life insurance plans yield more returns on saving while providing a life cover. Life insurance industries have evolved through the decades to provide returns on investments with the ULIP plans. While ULIP plans provide flexibility in investment based on risk profile, it also helps you save on tax*. Therefore, it is important to understand the important tax deduction and exemption benefits to utilise this tax advantage. Here is a detail on the most common FAQs on ULIP taxation.

What is a ULIP plan?

Unit Linked Insurance Plan is a comprehensive life insurance plan that provides a life cover and returns on the investment. It has a lock-in period of 5 years. The investment is based on the policyholder's risk profile. Therefore, individuals can invest in equity, debt or hybrid funds.

They can also switch between the funds based on the economic conditions and the market fluctuations.

With this brief, let us get ahead with the queries on ULIP taxation.
 

1. Does the premium paid for a ULIP insurance plan qualify for tax deduction?
   
   Yes, the premium amount paid for investing in these plans qualifies for tax deduction under Section 80C of the Income Tax Act. An individual can claim the deduction for the ULIP plan purchased for self, spouse or children. The deduction is also applicable for HUF and any member of the HUF. However, the deduction is based on the capital sum assured. The premium payable for the ULIP plan should be less than 10% of the sum assured.
   
   It is also important to note that the total allowable deduction under Section 80C for all investments such as fixed deposits, equity-linked savings schemes, etc., including the ULIP income tax deduction, is ₹1,50,000.
   
   
2. Is the deduction on the premium amount applicable if the taxpayer terminates the policy? 
   
   ULIP plan has a lock-in period of 5 years. Therefore, the deduction will be applicable for the taxpayer only when he has paid the premium for five consecutive years.
   
   
3. What is the tax exemption available on the ULIP plan issued before 01-02-2021?
   
   For all policies issued before 01-02-2021, the plan qualifies for tax* exemption if the premium is less than 10% of the capital sum assured under Section 10(10D) of the Income Tax Act, 1961.
   
   
4. What is the tax exemption available on the ULIP plan issued after 01-02-2021?
   
   The Finance Bill, 2021, proposed an amendment for the tax exemption on ULIP plans. For all plans issued on or after 01-02-2021, the premium payable for the ULIP policy should be less than 10% of the sum assured. In addition, the premium should not exceed ₹2,50,000 for any year during the policy tenure.
   
   And, if a taxpayer has multiple ULIP plans, the aggregate premium for all the policies in any year should be less than ₹2,50,000. Therefore, the exemption of tax on the ULIP maturity amount is allowable on lesser premium ULIP plans whose aggregate is under the threshold limit of ₹2,50,000.
   
   
5. What benefit does the tax-saving ULIP offer on the policyholder's death?
   
   In the case of the policyholder's death, the exemption under Section 10(10D) will not be denied on the excess premium plan (premium is greater than 10% of the sum assured) or more premium (premium is greater than ₹2,50,000).
   
   
6. Under which heads of income is the proceeds from the ULIP plan taxable?
   
   When the plan does not qualify for the tax exemption under Section 10(10D), the sum received is considered a capital asset defined under Section 2(14) and is taxable under the head 'Capital Gains'. 
   
   
7. How much is the applicable capital gains tax on ULIP policy?
   
   Excess premium policies are taxable at applicable rates for short term capital gains and 20% with indexation for long term capital gains depending on the tenure of the policy and redemption of units.
   
   The tax rate on premium ULIP policies will be based on the nature of the capital assets, whether short term or long term. If the period of holding the plan is greater than 36 months, the proceeds are treated as long term gains, if period is less than that it is treated as short term gains.
   
   The Finance Bill, 2021, defined the 'Equity Oriented Fund' for ULIP plans invested in the equity funds (65% of the total proceeds are from equity shares of domestic companies listed in recognised stock exchanges). The holding period to determine the nature of the capital asset is 12 months instead of 36 months for such funds.
   
   Therefore, if the plan is equity-based and chargeable to STT (Securities Transaction Tax), the tax calculation is as follows:
   
   
   • Rate of 15% charged on short term capital gains (Section 111A)
     
   • Rate of 10% charged on long term capital gains (Section 112A)
   
   And, for other ULIP plans based on debt and hybrid funds, the taxability will be based on the general tax provisions.
   
   
8. Is STT (Securities Transaction Tax) levied on ULIP plans?
   
   The Finance Act, 2021 proposed STT be levied on these plans at the rate of 0.001% on the transaction value if the following conditions are satisfied:
   
   
   • ULIP plan is issued after 01-02-2021.
   • The taxpayer has transferred the units of the equity-based funds issued by the insurance provider.
   • An amount is received due to surrender, sale or redemption of the units due to maturity or partial withdrawal.

Conclusion
 

ULIP plans offer a great benefit to investors looking for returns while securing their family's financial future with a life cover. In addition, the Government of India has introduced tax provisions to include deductions and exemptions on taxable income to reduce the income tax payable considerably. Therefore, understand the prevailing tax laws and invest accordingly for maximum protection and tax* benefits!
 

L&C/Advt/2022/Dec/3368