Are my maturity proceeds from ULIP Taxable?

Income Tax Income from Capital Gains
1

What is a ULIP?

Unit Linked Insurance Plans popularly known as ULIPs are considered a good investment option as it is an optimal combination of insurance coverage and investment avenue. From the total premium paid towards ULIP, some portion is utilized for insurance cover and the remaining portion is utilized for investment.

There are various ULIP plans available for an investor, which are similar to mutual funds.

In budget 2021, the Finance Minister announced the revision in the limit of premiums for determining ULIP Taxation.

So, let’s understand ULIP taxation before and after the 2021 budget announcement:

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Note:

  1. The limit of ₹2,50,000 is to be considered for premiums paid on a single policy or aggregate of premiums paid on multiple policies for a particular PAN during the term of policies purchased after 1 Feb 2021.
  2. Any maturity proceeds received by the nominee at the time of death of the policyholder will be exempted u/s 10(10D) even if the premium paid on such policy exceeds the limits specified.

Let’s understand better with the help of an example.

Example:

On April 1, 2022, Ms. Singh purchased a ULIP policy assuring a sum of ₹50,00,000 on which she pays a premium of ₹2,00,000 every year during the term of the policy. On July 1, 2022, she purchased another policy assuring a sum of ₹10,00,000 on which she pays a premium of ₹1,00,000 every year during the term of the policy. What shall the tax implications?

Solution:

Ms. Singh has purchased two ULIP policies, both after February 1, 2021 hence the maturity proceeds of the policies will be exempted u/s 10(10D) only if the premium paid for a single policy as well the as aggregate premium paid on both the policies **does not exceed ₹2,50,000 in any year during the term of the policy.

To understand taxation better let’s refer to the table below:
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Since the policy was purchased on April 1, 2022 and Ms. Singh pays a premium of ₹2,00,000 which is less than the limits prescribed (i.e. ₹2,50,000), the maturity proceeds will be exempted u/s 10(10D). She is also eligible to claim a deduction u/s 80C up to ₹1,50,000.

For the policy purchased on July 1, 2022, the premium amount is ₹ 1,00,000. Therefore, the aggregate of premium of both policies (i.e. ₹ 3,00,000) exceeds the limits (i.e. ₹2,50,000). Now, Ms. Singh gets an option to choose to avail exemption in respect of any one of the two policies as an exemption in respect of both policies cannot be availed because the aggregate premium exceeds the limits specified.

It is advisable to claim the exemption in respect of the first policy as the maturity proceeds (i.e. ₹50,00,000) are higher than the maturity proceeds of the second policy (i.e. ₹10,00,000).

For the purpose of taxability, the maturity proceeds of the second policy shall be taxable under the head Capital Gain in the same way as the Listed Equity Instruments or Mutual Funds are taxed, i.e. @15% if it is Short Term Capital Gain and @10% on any amount above the exemption limit of ₹1,00,000 if it is Long Term Capital Gain.

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2

Let’s understand ULIP Taxation better with the help of some more examples.

Example 1:

On March 1, 2012, Mr. Patel purchased a ULIP policy assuring a sum of ₹20,00,000, on which he paid a premium of ₹3,00,000 every year during the term of the policy. He received the maturity amount on March 31, 2022. What shall the tax implications?

Solution:

Mr. Patel purchased the policy on March 1, 2012, i.e, before April 01, 2012. Since the premium paid by him (i.e. ₹3,00,000) is less than 20% of the sum assured (i.e. ₹4,00,000), the maturity proceeds of ₹20,00,000 received by him will be exempted u/s 10(10D) and no tax will be levied on the same. He is also eligible to claim a deduction u/s 80C up to ₹1,50,000.

Example 2:

Mr. Kapoor purchased a ULIP policy on June 30, 2012, and paid a premium of ₹2,00,000 every year during the term of the policy, on a sum assured of ₹15,00,000. He received maturity proceeds of the same on June 30, 2022. What shall the tax implications?

Solution:

Mr. Kapoor purchased the ULIP policy after April 01, 2012.

Here, the premium paid (i.e. ₹2,00,000) exceeds the limit of 10% of the sum assured (i.e. ₹1,50,000), hence the maturity proceeds received by him will be taxable under the head Income from Other Sources and taxed at slab rates. He is also eligible to claim a deduction u/s 80C up to ₹1,50,000.

3

I bought a “UTI” ULIP in 2007 and it matured in April 2022, my sum insured for the same was around 5 lakh and I have been paying a premium of 32k every year from 2007 till 2019. And I got some bonus units in Jan 2022. How will it be all taxed including the bonus?

4

Hi @Walker

Since the policy is taken before 1 April 2012 and the premium paid every year (i.e. ₹32,000) is less than 20% of the sum assured (i.e. ₹1,00,000), the maturity proceeds received will be exempted u/s 10(10D) and no tax will be levied on the same. You’re eligible to claim a deduction u/s 80C up to ₹1,50,000.

This will be taxed under income from capital gains.

5

Hi. I took Reliance Nippon ULIP in 2018 with 5Lac per year premium and 50L sum assured. Completed 5 years premium payments. Planning to surrender on maturity in 2027. I’m a NRI on OCI. All premiums paid through NRE account. What will be Indian tax I need to pay on surrender? Thanks

6

to make one thing clear which I didn’t mention earlier was the ULIP plan was UTI ULIP, now are there any other taxes applicable or it will be same ?

7

Hi @Walker

The taxability shall not differ for a UTI ULIP.
No there is no other tax applicable.

8

Hi, i purchased UTI ULIP IN 2010 with annual premium of 1lac rupees. Maturity year 2020, 10 year term. Sum assured 10lacs.

I paid only 8lac in premium and I sold the ulip on 20oct 2022 with proceeds amounting to 16.5lacs.

Will any kind of tax is applicable on this? How to show this is the tax return?
PS: UTI has not deducted any TDS, are they suppose to deduct if at all? This amount is not coming in 26AS but its shown in AIS form for me.

9

Hi @Sanyam_Kumar

Since the annual premium paid for the ULIP does not exceed 2.5 lakhs during the term of the policy, then the amount received including the bonus will be exempt at the time of redemption.

You can show it under exempt income under IFOS.