Tax on sale of ULIP’s in India

Unit Linked Investment Plans, or ULIPS, are a type of insurance-linked investment plan. The premium paid is invested in equity, debt, and money market instruments, giving the client who chooses a ULIP Plan not only the benefits of insurance but also the rewards of capital appreciation.

This article discusses the taxability of premiums paid for ULIPs as well as the money received from ULIPs on Redemption/ Maturity.

Deduction under Section 80C

The premium paid for a ULIP is deductible from total income in the year in which the premium is paid under Section 80C.

For ULIPS purchased after 1st April 2012

For ULIP plans purchased on or after April 1, 2012, the deduction for ULIP investment is only allowed if the premium is less than 10% of the sum assured in any of the years the premium is paid. With the help of an example, this may be explained.

For instance, if the total assured under a ULIP Plan is Rs.1,000,000, the ULIP premium paid should not exceed Rs.10,000.

If the premium paid is greater than 10% of the sum promised, the entire payment assured will be fully taxable in the year in which it is received. However, it is vital to highlight that if the money is received as a result of someone’s death, it is not taxed under any circumstances.

For ULIPS purchased after 1st April 2013 for Disabled

If the ULIP Plan is purchased on or after April 1, 2013, the premium paid shall be less than 15% of the sum assured, assuming the ULIP is purchased to cover the life of any individual who is:

• A person with a disability or a person with severe disability as referred to in Section 80U.
• Suffering from an illness or ailment as defined in Section 80D Rules.

If the premium paid exceeds 15% of the total promised, the sum assured is fully taxable in the year of receipt.

It is vital to remember that if the money is received as a result of someone’s death, it will not be taxable under any circumstances.

For ULIPS purchased before 1st April 2012

Before April 1, 2012, the maximum premium paid was 20% instead of 10% for ULIP plans acquired before that date. If the premium paid exceeds 20% of the sum promised, the sum assured is fully taxable in the year of receipt.

It is vital to remember that if the money is received as a result of someone’s death, it will not be taxable under any circumstances.

What is the Maximum Tax Deduction for ULIPS?

This section allows for a maximum deduction of Rs.1,50,000 per year. This is a one-time deduction that can be taken in the year in which the payment is made. This deduction is permissible:

• In case of Individuals – Allowed for a premium paid for Self/ Spouse or any Child.
• In case of HUF –Allowed to the HUF for a premium paid on behalf of any member of the HUF.

It is crucial to note that the Rs.1,50,000 restriction does not apply only to ULIPS; it also applies to investments in various defined instruments that are eligible for a deduction under Section 80.

Mutual funds, insurance plans, and a five-year tax-saving fixed deposit are some of the additional investments that can be deducted under Section 80C. It’s vital to remember that the total amount invested in all of these instruments is Rs.1,50,000.

Tax on Amount received on Maturity/ Early Redemption

If the ULIP Plan was continued for a minimum of 5 years, the money received at maturity is not taxable.

In case it was not kept in force for 5 years and was terminated:

• Either by giving a notice
• By not paying the Premium

In such instances, the earlier Section 80C deduction would become taxable. The premiums paid in the past for which a deduction was claimed are now taxable in the year the coverage is cancelled.

Other Relevant Points

• If the premium is paid on behalf of the parents, there is no tax deduction.
• If the amount received on maturity/redemption is greater than Rs.1 lakh, TDS at the rate of 1% is due under Section 194DA. If the sum is less than Rs.1 lakh, no TDS will be deducted.