Tax on sale of ULIP’s in India

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ULIPS stands for Unit Linked Investment Plans and is an Insurance cum Investment Plan. The Premium paid is invested in Equity, Debt and Money market instruments and the person opting for a ULIP Plan not only gets the benefits of Insurance but also gets the benefits of appreciation in the value of the amount invested.

The taxability of Premium paid for ULIPs as well as the amount received from ULIPs on Redemption/ Maturity is discussed below in this article.

Deduction under Section 80C

The Premium paid for ULIP is allowed as a deduction under Section 80C from the total income in the year in which the premium is paid.

For ULIPS purchased after 1st April 2012

For ULIP plans purchased on or after 1st April 2012 – the deduction for investment in ULIPs is allowed only if the premium is less than 10% of the sum-assured for any of the years during which the premium is being paid. This can be explained with the help of an example.

For example: If the sum assured in a ULIP Plan is Rs. 1,00,000, then the amount of ULIP premium paid should not be more than Rs. 10,000.

In case the premium paid is more than 10% of the sum assured – the total sum assured would be fully taxable in the year in which the sum-assured is received. However, it is important to note here that in case the amount is received on account of death – the amount received would not be taxable under any circumstances.

For ULIPS purchased after 1st April 2013 for Disabled

If the ULIP Plan is purchased on or after 1st April 2013 – the premium paid should be less than 15% of the sum assured provided than the ULIP is purchased for insuring the life of any person who is.

  1. A person with disability or a person with severe disability as referred to in Section 80U; or
  2. Suffering from disease or ailment as specified in Rules made under Section 80D

In case the premium paid is more than 15% of the sum assured – the sum assured would be fully taxable in the year of receipt.

It is important to note here that in case the amount is received on account of death – the amount received would not be taxable under any circumstances.

For ULIPS purchased before 1st April 2012

For ULIP Plan purchased before 1st April 2012 – the limit for premium paid was 20% instead of 10%. In case the premium paid is more than 20% of the sum assured – the sum assured would be fully taxable in the year of receipt.

It is important to note here that in case the amount is received on account of death – the amount received would not be taxable under any circumstances.

What is the Maximum Tax Deduction for ULIPS?

The maximum deduction allowed under this Section is Rs. 1,50,000 for each year. This deduction is allowed in the year in which the payment is made. This deduction is allowed:-

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

It is important to note that this limit of Rs. 1,50,000 is not only for ULIPS but is a combined total for investments in various specified instruments which are allowed as a deduction under Section 80C.

Some other investments which are allowed as a deduction under Section 80C include Mutual Funds, Insurance Plans, 5 year Tax Saving Fixed Deposit etc. It is important to note here that Rs. 1,50,000 is the sum total of the amount invested in all these instruments.

Tax on Amount received on Maturity/ Early Redemption

The amount received on maturity is not taxable if the ULIP Plan was continued for a minimum period of 5 years.

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

  1. Either by giving a notice, or
  2. By not paying the Premium.

In such cases – the deduction claimed earlier under Section 80C would get taxable. The premium paid earlier for which the deduction has been claimed would now get taxable in the year in which the policy is terminated.

Other Relevant Points

  1. There is no Tax Deduction in case the premium paid is on behalf of Parents.
  2. The amount received on maturity/redemption is liable to TDS @ 1% under Section 194DA if the amount received is more than Rs. 1 Lakhs. No TDS would be deducted in case the amount is less than Rs. 1 Lakhs.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.