Tax implications of Investment & Redemption of ULIPs

Published On - March 23, 2015

admin Income Tax, Income Tax Deductions

Investments in ULIP come with tax benefits both at the time of investment as well as on maturity.
Tax benefit on Investment – Premium paid for a ULIP is eligible for tax deduction under section 80C.
         For ULIPs purchased after 1st April 2012

  • The deduction under section 80C can be availed when the premium is less than 10% of the sum assured.
  • If the premium is more than 10% of the sum assured the tax deduction is allowed on the amount equal to 10% of the sum assured.For ULIPs purchased before 1st April 2012
  • The deduction under section 80C can be availed when the premium is less than 20% of the sum assured.
  • If the premium is more than 20% of the sum assured the tax deduction is allowed on the amount equal to 20% of the sum assured.

Amount on which deduction can be claimed – The income tax act has laid down that ‘any amount paid to keep in force’ a policy can be claimed as a deduction. So pick the entire amount paid by you for Section 80C deduction. Include service tax and any other charges with have been collected by the insurer.
ULIP must be kept in force for 5 years to claim deduction – The premiums must be paid regularly and the ULIP must be continued to avail tax benefits. In case you discontinue your ULIP before 5 years, you will not be allowed any tax benefits. Any deduction allowed in the previous years shall get added back to your income in the year in which ULIP is closed.
Tax benefit on Investment on Maturity – If the premium paid on the policy is less than 10% of the sum assured during the term of the policy the amount received on maturity are exempt from tax. (For policies purchased before 1st April 2012, the premium must be less than 20% of the sum assured). This exemption is allowed under section 10(10D) of the Income Tax Act. You must report this as exempt income in your income tax return.
If the premium amounts are more than the % prescribed above, the entire money received at maturity has to be added under Income from other sources in the income tax return. This shall be taxable at the slab rate applicable to you.