Taxation of Unit Linked Insurance Plan (ULIP)
• By Asksolique.ai Team • Tax & Regulatory
What Is a ULIP?
A ULIP is a hybrid product combining Life insurance protection, and Market-linked investments.
ULIP’s fund is treated as equity- oriented if it invests 65% or more in shares/ equities; otherwise, it falls outside that equity - oriented classification(and may be debt or hybrid).
The types of ULIP are as under:
- Equity - Oriented ULIP: A ULIP that invests 65% or more of the premium in equity-based funds/securities.
- Debt - Oriented ULIP: A ULIP Other than Equity – Oriented is Debt oriented ULIP.
The premium is internally split between insurance charges and fund investments however taxation is based on annual premium paid, date of issue and conditions under Section 10(10D) of the Income-tax Act,1961.
How is ULIP taxed?
- For policies issued before February 01, 2021, all ULIP payouts (maturity or surrender) were fully exempt under Section 10(10D), regardless of the premium amount.
- For policies issued on or after February 01, 2021, where there is only one ULIP, the maturity proceeds remain exempt under Section 10(10D) if the annual premium does not exceed INR 2,50,000 and premium ≥10% of sum assured. If the premium exceeds INR 2,50,000, then the maturity or surrender will be taxable as capital gains.
- If multiple ULIPs are held, and the aggregate premium across all policies exceeds INR 2,50,000, then the ULIPs with premiums within INR 2,50,000 will remain exempt under Section 10(10D), while the remaining ULIPs will be taxable as capital gains.
| Type of Fund | Holding period | Tax Type | Tax Rate |
|---|---|---|---|
| Equity | >12 months | LTCG | 12.5% on gains above INR 1,25,000 |
| Equity | ≤12 months | STCG | 20% |
| Debt* | >24 months | LTCG | 12.5% |
| Debt* | ≤24 months | STCG | Slab rate |
*Debt based ULIPs issued after April 01,2023 are classified as short term irrespective of holding period and taxed at slab rate u/s 50AA.
Illustration
| Policy & Type | Issue Date | Annual Premium | Total no. of premium paid | Maturity Proceeds | Tax Rate | Capital Gain | Tax Amount |
|---|---|---|---|---|---|---|---|
| A | B | C | D | E | F | G = E – (C* D) | H = G * F |
| 1 – Equity or Debt | April 1, 2020 | 5,00,000 | 4 | 23,00,000 | NA | - | - |
| 2 – Equity | April 1, 2021 | 4,00,000 | 3 | 17,00,000 | 12.5% above 1,25,000 | 5,00,000 | 46,875 |
| 3 – Debt | April 1, 2021 | 3,50,000 | 4 | 18,50,000 | Slab rates (Assumed 30%) | 4,50,000 | 1,35,000 |
| 4 – Equity | April 1, 2021 | 1,50,000 | 4 | 9,00,000 | Exempt u/s 10(10D) | - | - |
| 5 – Debt | April 1, 2022 | 1,00,000 | 3 | 7,00,000 | Exempt u/s 10(10D) | - | - |
- The maturity date for all the policies is assumed to be March 31,2025.
- Policy 1 issued before February 1,2021 hence not taxable.
- The above-mentioned tax rate is exclusive of surcharge and cess.
- Assumed premium ≥10% sum assured on all the policies.
- The above-mentioned amounts are in INR.
Conclusion
ULIPs continue to offer a mix of protection and investment, but their tax treatment is no longer uniform. The benefits you ultimately receive now depend on when the policy was taken and the overall premium you pay each year. If the total premium stays within the prescribed limit, the returns remain tax-free; if it exceeds the limit, the earnings are taxed like any other market-linked investment.
In essence, ULIPs still work well, but it has become important to plan your premium amounts and number of policies carefully so that you don’t lose the tax advantage unintentionally.
Disclaimer:
The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.
This author will not be liable for any loss or damage caused by the reader’s reliance on information obtained through this report. The contents are provided for your reference only.
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