Unit Linked Insurance Plan (ULIP) is a single plan that caters to your two financial needs. It provides you with life insurance with an investment aspect in the same plan. You are required to pay premiums on your ULIP similar to any other life insurance. The premiums that you pay are then used to provide you with a life cover and to invest in funds of your choice.

It provides security to your loved ones along with multiplying your returns on investments. In case of your unfortunate demise, the nominee will receive the death benefit from the ULIP. The amount is the sum assured or the fund value of your ULIP, whichever is higher. Also, you receive the maturity benefits when you survive the ULIP period. It comprises the amount you invested and the returns you earned. One of the unique ULIP benefits is that you can choose your funds and also switch your fund allocation anytime you want.

Once you understand the structure of your plan, it is important to understand the tax implication of your plan. Being an investor, knowing the ULIP tax benefits is as important as knowing the returns of your plan. Since the structure of ULIP is unique where you get life insurance and investment opportunities in a single plan, it offers several tax benefits.

Understanding ULIP tax implication

The structure of a ULIP is designed in a manner that the plan offers tax benefits on multiple levels of the policy. Here are the tax benefits of a ULIP on different levels:

Tax implication on premiums

You purchase a ULIP by paying premiums towards it. You can avail of the tax deduction on the premium that you pay for your ULIP under Section 80C of the Income Tax Act. The tax deductions can be claimed for up to Rs 1,50,000 in a given financial year. Whether you pay your premiums monthly, quarterly, or yearly, you can claim the deduction for it while doing the taxes.

Tax implications on maturity

Your ULIP benefits depend on the funds you choose and the returns that you earn on them. Based on your risk appetite, you can invest in debt, equity, or balanced funds. The tax deduction that you can claim when your ULIP matures depends upon the type of funds you have invested in and the proportions of it.

If your ULIP comprises over 65% fund allocation in equity, your fund will be treated as an equity fund and be taxed accordingly. Any equity fund that is above Rs 1,00,000 is directly subject to taxation. According to Section 112A of the Income Tax Act, a 10% direct tax rate is imposed on any profits that you make through equity funds. While according to the same Section 111A, any profits earned from debt funds are subjected to a direct tax of 20%.

According to the Union Budget of 2021, if the premium of your ULIP plan exceeds Rs 2,50,00, any gains from the plan will be treated as capital gains and directly charged a 10% tax on maturity. Also, according to the latest amendment, when one redeems their ULIP, a Security Transaction Tax (STT) applies. The basic meaning of this change is that ULIP will be treated as any other equity investment. Section 111A and 112B apply when you redeem your maturity amount. These charges only apply to any ULIPs that are purchased after the 1st of February 2021.

Tax implication on the death benefit

Along with the investment component of ULIP, it is also important to remember that a ULIP is a life insurance policy. The ULIP tax benefits apply to both investments and life insurance. In case of your sudden demise, the nominee receives the death benefit. The death benefit is completely exempt from taxes under Section 10 (10D) of the Income Tax Act.

ULIP is a tax-saving plan that allows you to accomplish your two financial goals easily. You can build an exponential corpus for your future while keeping your loved ones secure.