Unit Linked Insurance Plans (ULIPs) are a popular investment option for Indians, offering the dual benefit of life insurance and wealth creation. However, the tax implications of ULIP maturity proceeds often confuse policyholders. Understanding ULIP policy maturity tax rules is crucial for financial planning and optimising returns. The tax treatment of ULIP proceeds depends on the policy premium, tenure, and compliance with specific conditions laid down by Indian tax laws. Additionally, provisions like Section 10(10D) and the recent Rs. 2.5 lakh premium threshold introduced in the Union Budget 2021 have reshaped the tax landscape for ULIPs.
 

In this article, we will explore the tax treatment of ULIP maturity proceeds, exemptions under Section 10(10D), and rules for ULIPs with premiums exceeding Rs. 2.5 lakh annually.

• Section 10(10D) ensures tax-free ULIP maturity proceeds if premium-to-sum assured ratios are met.

• High-premium ULIPs (over Rs. 2.5 lakh annually) are subject to capital gains tax.

• Death covers from ULIPs are always tax-exempt, irrespective of premium or tenure.

• ULIPs issued before February 1, 2021, are unaffected by the Rs. 2.5 lakh threshold rule.

• Careful tax planning can maximise benefits from ULIP investments.

The tax treatment of ULIP maturity proceeds depends on factors like the premium amount, policy terms, and adherence to Income Tax Act provisions. ULIP maturity proceeds may either be tax-free or taxable, depending on whether they meet the conditions under Section 10(10D).
 

Key considerations for ULIP maturity proceeds:

• Compliance with Section 10(10D): If the premium paid does not exceed 10% of the sum assured, the maturity proceeds are tax-free under Section 10(10D).

• High-premium ULIPs: ULIPs with annual premiums exceeding Rs. 2.5 lakh are subject to taxation as per the Budget 2021 amendments.

• Capital gains tax for taxable ULIPs: If a ULIP fails to meet the 10% rule or exceeds the premium threshold, the maturity proceeds are treated as capital gains and taxed accordingly.

• Exemptions for death cover: Regardless of the premium or sum assured, the death benefit from a ULIP is fully exempt from tax.

• Tax Deduction at Source (TDS): For taxable ULIP proceeds, the insurer may deduct TDS before payout if the amount exceeds Rs. 1 lakh.

Section 10(10D) provides tax exemptions for maturity proceeds of ULIPs, subject to certain conditions. This exemption ensures that policyholders enjoy tax-free returns, provided the policy complies with the specified premium-to-sum-assured ratio.
 

Conditions for exemption under Section 10(10D):

• Premium-to-sum assured ratio: The annual premium must not exceed 10% of the sum assured for policies issued after April 1, 2012. For earlier policies, the limit is 20%.

• Policy tenure: The policy must be held for the minimum tenure prescribed by the insurer, usually five years or more.

• Death cover exemption: Death covers are fully exempt under Section 10(10D), irrespective of the premium amount or policy terms.

• No premium threshold for older policies: Policies issued before April 1, 2012, with higher premium-to-sum assured ratios, continue to enjoy exemptions.

• Non-exempt ULIPs: If the policy does not comply with Section 10(10D), the maturity proceeds are taxable.

The Union Budget 2021 introduced significant changes to the tax treatment of ULIPs with high premiums. These rules ensure parity between ULIPs and equity-oriented mutual funds, especially for investors with large ULIP investments.
 

Tax rules for high-premium ULIPs:

• Taxable proceeds: If the annual premium exceeds Rs. 2.5 lakh, the maturity proceeds are taxable under capital gains tax rules.

• Capital gains classification: Taxable proceeds are classified as equity investments, attracting Short-Term Capital Gains (STCG) at 15% or Long-Term Capital Gains (LTCG) at 10%, depending on the holding period.

• Applicability: The Rs. 2.5 lakh threshold applies only to ULIPs issued after February 1, 2021. Existing policies are unaffected by this rule.

• Multiple policies: If an individual holds multiple ULIPs, the total premium of all policies is considered for determining taxability.

• Exemption for death covers: Death covers from high-premium ULIPs remain tax-free, ensuring financial security for the nominee.

Understanding ULIP policy maturity tax rules is essential for informed financial planning. While Section 10(10D) provides generous exemptions for most ULIPs, policies with premiums exceeding Rs. 2.5 lakh are now subject to taxation. Policyholders should carefully evaluate their investment goals and premium levels to maximise returns and minimise tax liabilities.