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ULIP - How are the maturity proceeds taxed?

October 16, 2018 14504
Investment and security - these are two important pillars of your financial strength and proper decisions in these two domains can ensure your financial freedom for life. Most of us are always on the lookout for guaranteed income insurance plan for safe returns and capital gains and the market is full of many such options. However, ULIPs (Unit Linked Insurance Plans) are exclusively beneficial and widely trusted for their comparative advantages.  

Not only do ULIPs provide joint coverage of security and investment for your funds, but also offer a range of exclusive tax benefits both at the time of investment and at the time of returns. Premiums paid for ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, 1961.

For ULIPs purchased after 1st April 2012

The income tax 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 percentage offered in the plan, 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.

HDFC life offers HDFC Life Click 2 Invest ULIP - a unit linked plan that charges you minimally and provides a host of market linked returns.

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HDFC Life Insurance Company Limited. CIN: L65110MH2000PLC128245, IRDAI Reg. No. 101.

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