Tax Implications on ULIP Redemption
ULIPs or Unit Linked Insurance Plans are one of the most popular financial instrument that has attracted the interest of several retail investors. Many people prefer investing in ULIP over other life insurance policies mainly because it provides them dual benefits of insurance protection and returns on investment. Also, it offers attractive tax-benefits.
Many investors check the annual tax benefit to save their taxes before investing in any financial instrument. But, it is wise to check the tax implications on the maturity of the insurance policy like ULIP or any other investment. If you have invested in ULIP, you are eligible to get tax benefit on the premium payment under Section 80C of the IT (Income Tax) Act. But, you do you know about the tax benefits on maturity?
Tax implications on redemption of ULIP investment.
You can redeem you ULIP investment before the lock-in period of five year, after five years or upon maturity of the policy, based on your requirement. However, you must that the tax treatment will be different in each case, which is discussed below.
- On maturity of the policy
After the completion of the policy term, ULIPs automatically mature and insurer will pay back the accrued corpus to you or to your nominee. This amount is completely tax free under Section 10(10D) of the Indian Income Tax Act. However, you an avail the tax benefit only if you fulfil the following conditions –
For ULIPs purchased after 1st April 2012
If the premium is more than 10% of the sum assured, the tax deduction on premium payment is allowed on the amount equal to 10% of the sum assured and the amount received at maturity is fully taxable as per the regular tax bracket.
For ULIPs purchased before 1st April 2012
If the premium is more than 20% of the sum assured, the tax deduction on premium payment is allowed on the amount equal to 20% of the sum assured and the amount received at maturity is fully taxable as per the regular tax bracket.
- On policy surrender (before lock-in period)
If you surrender the policy before the lock-in period of five years, the entire surrender value will be treated as an income in the current financial year and the amount is added to the total gross income and it will be taxed as per your tax slab.
For instance, if the surrender value of your ULIP is Rs. 2 lakhs and the total income in the financial year apart from the surrender value is 10 lakhs. In this case, for taxation purposes, your total income will be considered as Rs. 12 lakhs and the entire income will be taxed accordingly.
- On policy surrender (after lock-in period)
If you surrender your ULIP plan after the mandatory lock-in period of five years, the total amount you receive, i.e., the surrender value will be fully tax-free. This means if you stay invested for long, you can get valuable savings on your annual tax liability.
Thus, ULIP is an excellent investment option for both tax saving and securing your family’s financial future in the event of any unfortunate incident. Know the tax implications of ULIPs and make the most out of your investment.