Life insurance is essential for everyone; at some point in time, we feel the need to purchase a life insurance policy for life insurance coverage or for making an investment. ULIP investment in India is a popular form of investment that helps policyholders earn from returns and also secure their families with life insurance coverage.
When you are buying a Unit-Linked Insurance Plan, you learn about the various components of a ULIP. But with so much information to absorb, it is possible that you may miss out on the taxation of ULIP plans. This is important since ULIP is a long-term wealth-creation product that can also offer tax* benefits. However, being a market-linked investment plan, there may be various reasons why one may choose to surrender a Unit-Linked Insurance Plan.
Apart from learning about the coverage benefits and the various ULIP charges, here is what you should know about the taxability of a ULIP once it is surrendered.
When Can You Surrender a Unit-Linked Insurance Plan?
There are no specific restrictions on the surrender of ULIP insurance. However, here are some things you need to consider before surrendering a Unit-Linked Insurance Plan. The lock-in period of a ULIP is 5 years. Surrendering the policy within this lock-in period will not only attract a penalty but will also render the surrender value taxable.
Even if you surrender the ULIP after the 5-year lock-in period, your investment will not have appreciated or increased to the extent it would have if you chose to complete the policy term. Therefore, this will again lead to the deduction of surrender charges as well as the loss of a long-term investment.
The right time to surrender the policy would be, in case of dire emergencies, after the premium paying period, in case the policy term is longer than the premium paying term. If you are investing in a ULIP through the Regular Pay option, then it is advisable to complete the policy term so that you can get the maturity benefits of the ULIP and any other loyalty additions for completing the policy term.
Of course, you can make partial withdrawals from your ULIP funds once the lock-in period is over in case you need some financial assistance from time to time. However, the complete withdrawal will result in the loss of the investment.
Taxability of ULIP in India
Before you buy a ULIP, it is always advisable to know about the various charges involved in purchasing a ULIP. For instance, there are mortality charges, premium re-direction charges, fund management charges, and more. You may also be charged if you exceed the maximum number of free fund switches allowed under the ULIP policy.
These fund switches enable you to move your investment allocation from one fund to another as per the options under the ULIP, so that you can realign your investment in case one or two of the funds do not perform as expected.
As we know, you can choose to surrender your ULIP insurance at any point in time. This can happen during the lock-in period or after the lock-in period. And both of them have their individual outcomes, which we can discuss here.
ULIP Taxability before Maturity
The ULIP surrender amount is also taxable; moreover, there are also discontinuation charges to be paid. If the ULIP is surrendered before the 5-year lock-in period, the total surrender value counts as income for the current financial year and is added to the policyholder’s total gross income.
After that, the applicable tax* slab of the individual will determine the amount of tax* to be paid on their total income for the year, which also includes the surrender value.
ULIP Taxability on Maturity
When you receive the maturity benefit or the returns on your ULIP, the taxability of ULIP on maturity will be as follows:
- The maturity amount will not be taxed as the maturity benefit is tax*-free. Under Section 80C of the Income Tax* Act, the premiums paid towards the ULIP will be eligible for tax* deductions, while under Section 10(10D), the payout of the maturity benefit is exempt from taxes.
- If the ULIP is surrendered after the completion of the 5-year lock-in period or after the policy maturity, there will be no penalty charges applicable. On maturity, the whole surrender amount will be free from taxation.
Our company also offers benefits such as loyalty additions and a refund of some of the charges on its ULIP plans if you withdraw or surrender the policy only on maturity.
The use of a ULIP calculator is also advised not only before you purchase a ULIP but also when you are investing in the ULIP. Apart from knowing how much you need to invest in the ULIP, this calculator can also help you know the expected returns you can earn from your investment. Of course, inflation and other factors will affect the actual returns, but with an expected inflation rate in the calculator, you can get a closer estimate of your returns.
Conclusion
Apart from just investing in a ULIP plan, you should also know how it can best protect your loved ones from unfortunate events and keep them secure in your absence. However, another important component is taxation which should also be considered since an investment with tax* benefits is an added advantage for any policyholder/investor.
L&C/Advt/2022/Dec/3366