ULIP taxation at maturity: What you need to know
ULIPs are popular in India for a reason. They combine life insurance with market-linked investments, offering a blend of protection and growth. However, when it comes to maturity, the tax treatment depends on a few critical factors
New Delhi [India]: After years of disciplined investing, your ULIP (Unit Linked Insurance Plan) finally matures. You’re ready to use that payout—maybe for a long-planned family vacation, your child’s education, or even as a safety net for retirement. But just as you’re envisioning the possibilities, a nagging thought creeps in: Will taxes chip away at this hard-earned sum? Understanding the tax implications at maturity can make a big difference.
ULIPs are popular in India for a reason. They combine life insurance with market-linked investments, offering a blend of protection and growth. However, when it comes to maturity, the tax treatment depends on a few critical factors. Let’s explore in detail.
Tax-free rule
You can enjoy full tax benefits on your ULIP, under Section 10(10D) of the Income Tax Act, 1961, if the policy was issued on or after February 1, 2021, and your total annual premium across all policies is below ₹2.5 lakh while remaining under 10% of the sum assured.
However, for policies issued after February 1, 2023, the total annual premium paid across all ULIPs should not exceed ₹2.5 lakh to qualify for tax exemption. So, if you’re insured for ₹10 lakh, your annual premium may be ₹1 lakh or less. If this condition is met, the entire payout—whether ₹5 lakh or ₹50 lakh—is exempt from tax.
Do note, ULIPs purchased between April 2012 and February 2021 with premiums below 10% of the sum assured offer completely tax-free returns. For policies acquired before April 2012, tax-free maturity benefits were applicable when premiums were less than 20% of the sum assured.
Consider Ravi, a 38-year-old teacher who invested in a ULIP with an annual premium of ₹75,000 and a sum assured of ₹10 lakh. His policy was issued on March 1, 2023. When his policy matures, let’s say he receives ₹12 lakh. Since his premium is well within the 10% limit and he does not have any other ULIPs, he may not have to pay a single rupee in taxes on his maturity proceeds.
This rule can make ULIPs a tax-efficient choice, especially for long-term financial goals. Knowing this can help you plan better and avoid unpleasant surprises when it’s time to collect your payout.
If you exceed premium threshold?
When it comes to ULIPs, tax benefits and exemptions on the maturity amount depend on specific conditions, such as the annual premium, sum assured, and the number of policies. Let’s break down the tax implications for different scenarios:
If annual premium exceeds ₹2.5 lakh (policies after February 1, 2023)
For ULIPs issued on or after February 1, 2023, the annual premium should not exceed ₹2.5 lakh to qualify for tax-free maturity proceeds under Section 10(10D).
If the annual premium exceeds ₹2.5 lakh, the maturity proceeds lose their tax-free status. Instead,the amount exceeding the sum assured is taxed as income according to your tax slab. For instance, if the sum assured is ₹30 lakh and the maturity amount is ₹35 lakh, the ₹5 lakh difference is taxable.
If there are multiple ULIPs with combined premiums exceeding ₹2.5 lakh
If you own multiple ULIP policies issued after February 1, 2023, the combined premium of all these policies is considered for the ₹2.5 lakh limit.
Assume a scenario where you pay for Policy A with an annual premium of ₹1.5 lakh, and Policy B with an annual premium of ₹2 lakh. Thus, the combined total premium paid is ₹3.5 lakh (which exceeds the ₹2.5 lakh limit).
In such cases, the maturity proceeds of these policies will not be tax- exempt. The taxable portion is the amount exceeding the insured sum, aggregated across all the
policies.
If premium exceeds 10% of sum assured
For policies issued on or after April 1, 2012, the annual premium must not exceed 10% of the sum assured to retain tax benefits. If the premium exceeds 10% of the sum assured, only the maturity amount up to the sum assured is tax-free.
The excess payout, including bonuses or fund growth, is taxed as per your income tax slab.
For example, Ananya has a ULIP policy with ₹10 lakh sum assured and an annual premium of ₹1.5 lakh (15% of the sum assured). At maturity, she receives ₹18 lakh. The tax-free portion will be ₹10 lakh (sum assured), while the taxable portion will be ₹8 lakh (remaining maturity amount). This is applicable for this scenario only, and returns can vary depending on other scenarios.
Taxation on your ULIP maturity proceeds is subject to specific conditions such as when you started investing, the sum assured, and your annual premium. If you find this difficult to understand, it would be advisable to consult a financial advisor when it comes to your own specific case to understand your tax liability.
Key factors to consider
1. Review premium-to-sum assured ratio: Ensure your annual premium doesn’t exceed 10% of the sum assured. Staying within this limit maximizes your tax
benefits.
2. Stay updated on tax laws: ULIP tax regulations are subject to change. What applies today may not be valid tomorrow. Regularly reviewing the latest tax rules
will help you make informed investment decisions and maximize potential tax benefits.
3. Plan for the long term: ULIPs are designed for long-term goals. Short-term thinking can lead to decisions that undermine their tax efficiency.
4. Consult an insurance advisor: If you’re unsure about your ULIP’s tax implications, professional advice can be invaluable. It is better to plan ahead than face surprises later.
An Example on ULIP Taxation
Take the example of a brother-sister duo. Rohit, a doctor, invested ₹80,000 annually in a ULIP with a ₹10 lakh sum assured. Priya, a software professional, opted for a higher premium of ₹1.8 lakh. She already pays ₹1.2 lakh in another ULIP. Rohit’s payout was tax-free, aligning with the ₹2.5 lakh annual premium limit across all ULIPs. Priya, exceeding this limit with total ₹3 lakh premiums (₹1.8 lakh new policy and ₹1.2 lakh old policy), faced taxes.
The above example highlights the importance of staying within the premium limits and understanding how the sum assured and premium thresholds affect the taxability of ULIP returns.
ULIPs can be a powerful tool for building wealth and securing your financial future. But like any investment, they come with rules that you need to understand. Knowing how your maturity proceeds will be taxed ensures you can plan effectively and avoid last-minute surprises.
Before your ULIP matures, take a moment to review the fine print. Check your premium-to-sum assured ratio and stay updated on tax laws. These small steps today can make sure you reap the full rewards tomorrow—tax-free and as planned.
