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If the policyholder has paid an annual premium of over Rs 2.5 lakh for any of the years during the tenure of the ULIP, then the amount received will be taxable.
ULIPs have lock-in period of five years. (Representative Image)
A Unit Linked Insurance Plan (ULIP) is an investment cum insurance plan that offers a myriad of benefits. It is considered one of the great investment plans that comes with a lock-in period of five years. It provides long-term financial security, insurance coverage for your loved ones, tax exemption benefits and the potential for favourable returns on investment. In this plan, a part of the amount of premium invested is diverted partly towards life insurance to the policyholder and his family, while the remaining portion is invested in market-linked funds/securities of your choice.
For instance, you have invested in an insurance policy with a 10-year maturity period after which you will receive a fixed amount. In this case, the amount to be received at maturity remains fixed, whereas in the case of a ULIP, the maturity amount is determined by the performance of the market in which the premium is invested.
Before February 2021, all the returns the policyholder received on the maturity of a ULIP plan were tax-free under Section 10(10D) of the Income Tax Act (ITA). Moreover, they were allowed to claim a tax deduction under Section 80C.
But now, the Finance Act 2021 proposed certain provisions through amendments to Section 10(10D) to change the taxability of ULIP maturity proceeds. Those provisions are made applicable from February 1, 2021.
As per the amendments, the maturity amounts of ULIP plans will be categorised as capital assets. At maturity, partial or surrender, withdrawal, proceeds will be taxed to the policyholder as capital gains.
However, if you have paid an annual premium of more than Rs 2.5 lakh for any of the years during the tenure of the ULIP, then the amount received (including the bonus) at the time of maturity will be taxable.
Also, if you have purchased multiple ULIP plans and the aggregate premium paid exceeds Rs 2.5 lakh, then it is subject to taxation.
In addition to this, no taxation is imposed if maturity proceeds are received upon the demise of the policyholder. Regardless of the threshold on aggregate premium, the benefits received on policyholder’s death will continue to be tax-free. To claim the exemption, the family member has to provide policy documents, a death certificate, and other essential documents.
What are the maturity return requirements for the tax exemption benefit under Section 10(10D)?
1.At the time of the policyholder’s death, the claim must be paid out.
2.The compensation should not be covered under the Keyman Insurance Policy.
3.It is important that the payment should not be in the form of an annuity or retirement payout.
4.Benefits are not offered through the company’s group insurance policy.
5.The benefits are not obtained for insurance given under Section 80DD (3) of the Income Tax Act.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
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Delhi, India, India
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