Is ULIP Premium Tax Free?

ULIPs also called Unit-Linked Insurance Plans are special types of endowment plans which offer dual benefits of life insurance coverage and an opportunity to invest in the capital market. The ULIP plan's motive is to provide a corpus at the end of the policy term which is helpful to meet the long term goals of the policyholder. These goals include buying a car, building a house, retirement plans or any other long term goal desired by the individual.

Working of ULIP

A part of the premium invested in the ULIPs is invested in the shares or debt funds or a balanced mix of both by the insurer, according to the choice of the policyholder. The other part is set aside for providing life insurance cover. The investors are relieved from the burden of tracking the performance of these funds in the market as experienced fund managers are appointed to do this job. The total amount invested is split into multiple units by the insurer for which he assigns a particular face value. The number of units allotted to a person is proportional to the amount of premium he/she paid. The returns earned will in turn depend on the number of units a person holds. Switching of funds is also available to the policyholders after a lock-in period of 5 years. The policyholder can take advantage of the market fluctuations by switching the funds according to their performance.

Tax Implications For Unit-Linked Insurance Plans

After knowing about the working of the policy, let us see the tax benefits applicable to the ULIPs. 

A. Tax Benefit On Premium Paid

The premium upto 1.5 lakhs is completely tax free, under Section 80C of the Income Tax Act, 1961. The provisions in the Act, provide for tax deductions on the premium paid towards the Unit Linked Insurance Plans.  This is one of the most important single benefits of the ULIPs.

B. Tax Benefits On Maturity 

The Maturity Benefit of the ULIPs issued Prior to 1st February 2021, is free of tax under Section 10(10D) of the Income Tax Act,1961.  For the ULIPs issued after 1st February 2021, the maturity benefit is exempted from tax payment only if the aggregate premium in a financial year is less than 2.5 lakhs. If the aggregate premium exceeds 2.5 lakhs, then the Policy is treated as a Capital Benefit and there wouldn't be any tax deductions after maturity of that policy. These amendments in the Law are made by the finance bill 2021.

C. Tax Benefits on Partial Withdrawals

The policyholder can withdraw money from the ULIP plan after the lock-in period of 5 years. This action is called partial-withdrawal. The person need not pay any taxes on the withdrawal amount unless it is more than 20% of the fund. 

Conclusion

The Unit-Linked Insurance Plans are best suitable to the investors with a high risk appetite. Earlier it had more tax benefits but after the Financial Budget 2021, the exemptions were now bound with certain conditions. This was made mainly to reduce the difference between mutual funds and ULIPs on the basis of taxation benefits. Even now, the ULIPs enjoy better taxation benefits than the Mutual Funds.

Also Read: What Are The Features Of ULIP?

Common Misconceptions About ULIP

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.