Although ULIPs are one of the most effective tax-saving tools, most investors invest in them. This is the case since ULIPs are a combination of investment and insurance products, providing both annual rewards as an investment instrument and ULIP tax benefits as insurance instruments because ULIPs are regarded as insurance products by the Income Tax. ULIP offers an investor many additional advantages.
When investing in any financial instrument, most people check the annual tax advantage to reduce their tax liability. Still, checking the tax implications when a ULIP policy or other investment reaches maturity is prudent. ULIPs offer a section 80C deduction equivalent to the premium amount paid, but it’s important to concentrate on the tax benefit at ULIP maturity.
The total amount you or your nominee receive when your ULIP matures at the conclusion of its term is completely exempt from tax under section 10 if you’re interested in learning more about the income tax on ULIP surrender (10D). However, the tax advantages are only available if the requirements outlined in the Income Tax Act of 1961 are met with regard to insurance premiums. The ULIP plan calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Tax implications
Returns from unit-linked insurance plans now seem more alluring with the introduction of the LTCG levy on stock transactions. Although it has a different pricing structure, the investment portion of a ULIP functions similarly to a mutual fund. Various income-tax laws govern it. According to section 10 (10D) of the income-tax Act, proceeds from a life insurance policy—whether received at ULIP policy, maturity or by early surrender—are tax-free if the sum insured is at least 10 times the annual premium, assuming that ULIPs have a 5-year lock-in period. The death benefit, however, is tax-free. Given the anticipated 10.4% LTCG tax on equity investments made through mutual funds, this is good news for ULIPs.
This has reignited the argument over whether ULIPs or mutual funds are more convenient, as well as the effectiveness of keeping insurance and investments apart by purchasing term plans and making mutual fund investments. Even though experts increasingly favour ULIPs, they hesitate to suggest them as investment products.
Here are a few reasons you should think twice before surrendering a ULIP if you are unsure about the income tax implications.
Due to their hybrid nature as investment and insurance instruments that provide annual benefits as an investment instrument amongst ULIP tax benefits, ULIPs are regarded as an insurance product by the Income Tax department.
The majority of investors invest in ULIPs as they are the most viable tax-saving instrument. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
When investing in any financial instrument, most people check the annual tax advantage to reduce their tax liability. Still, it is prudent also to check the tax implications when an insurance policy, ULIP, or other investment reaches maturity. ULIPs offer a section 80C deduction equivalent to the premium amount paid, but it’s important to concentrate on the tax advantage after maturity.
According to the law, when your ULIP matures at the end of its term, the entire sum received by you or your nominee will be exempt from tax under section 10. (10D). However, the tax advantages are only available if the requirements outlined in the Income Tax Act of 1961 are met with regard to insurance premiums.
Currently, there are 2 tax regimes in India – new and old. To get the tax benefit you desire, choose the correct one after consulting an expert. You can opt for a regime change during the next financial year.
Surrendering before and after the lock-in period
What happens if the policy is cancelled before the five-year lock-in period? The entire surrender value will be considered income for the current year, added to gross annual income, and taxed at the applicable individual tax slab rate. Let’s use an example: If the surrender value of a ULIP is Rs. 3,00,000 and all other income is Rs. 15,00,000, the total income will be Rs. 18 lakhs, and all income will be taxed at the applicable slab rate.
What about the effects of income tax on the surrender of a ULIP? If the insurance is surrendered after the 5-year lock-in term, the surrender value will not be subject to taxation, and the insured may take advantage of the tax benefit. Consider the above-mentioned prior example. Suppose the ULIP policy‘s surrender value is Rs. 3,000,000, and the overall income, excluding the surrender value, is Rs. 15,000,000. In that case, the total income will be Rs. 15 lakhs, and the entire income is subject to tax at the applicable slab rate.
