Tax Implications on Redemption of ULIP

“It’s wise enough to get into something after knowing the best method of getting out of it.”

Unit Linked Insurance Plans are a very attractive insurance product post introduction of the long-term capital gain tax. Many investors invest in ULIPs as they are most viable tax saving instrument as they are hybrid of both insurance and investment instruments. It gives annual benefits as an investment instrument and tax benefits as insurance instruments, as Income Tax considers ULIPs as an insurance product.

The majority of individuals check the annual tax benefit to save the tax liability before investing in any financial instrument, but it’s wise enough to check the tax implication on the maturity of insurance policy, ULIP or any other investment. ULIPs provide deduction under section 80C equal to the amount of premium paid for ULIP, but it’s significant to focus on the tax benefit on maturity.

At Maturity

Upon the completion of the tenure of your Unit Linked Insurance Plan, when they mature, the total amount received by you or your nominee will be completely exempted from tax under section 10(10D). But the tax benefit can only be availed if the conditions stated in Income Tax Act 1961 are fulfilled in respect of insurance premium.

Conditions are as understated:

For ULIPs purchased after 1st April 2012

The deduction under section 80C will be availed when the premium is less than 10% of the sum assured, and amount on maturity will be exempted under section 10(10D). 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 and at maturity the entire amount is taxable.

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, the amount on maturity will be exempted under section 10(10D). 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 and the amount received on maturity is taxable.

If ULIP is surrendered

Before lock-in-period

If the policy is surrendered before the lock-in-period of 5 years, then the entire surrender value will be treated as income for the current year and will be added in Gross Total Income and thus will be taxed as per applicable tax slab rate of the individual.

For instance, if surrender value of ULIP is ₹3,00,000 and total income apart from surrender value is ₹15,00,000. Therefore the total income will be Rs. 18 lacs and the entire income will be taxed as per slab rate.

After lock-in-period

If the policy is surrendered after the lock-in-period of 5 years, then the surrender value will be exempt from taxation and assured can avail the tax benefit.

For instance, if the surrender value of ULIP is ₹3,00,000 and total income apart from surrender value is ₹15,00,000. Therefore the total income will be Rs. 15 lacs and the entire income is taxed as per slab rate.

Thus it is advisable to take up Edelweiss Tokio’s ULIP which is advantageous for saving tax both today and at maturity. ULIP are perfect combinations of insurance  and investment and serves two purposes in a single go. Go ahead and invest smartly!

 

Swati Tumar - Travel & Finance Writer   

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.