ITR Reporting for ULIPs: Maturity Proceeds and Capital Gains
- Dipali Waghmode
- Jul 24
- 10 min read
Unit Linked Insurance Plans (ULIPs) combine the benefits of both insurance and investment. They are designed to provide life coverage along with an opportunity to grow wealth by investing in a range of market-linked options, such as stocks and bonds. However, understanding the taxation implications of ULIPs is crucial for taxpayers to make informed decisions regarding their investment. As tax laws surrounding ULIPs continue to evolve, it’s important to stay updated on the latest regulations. Let us understand the current taxation rules for ULIPs, capital gains tax on ULIP maturity, the treatment of death benefits and partial withdrawals, and how to report ULIP-related income in your Income Tax Return (ITR). We’ll also provide a practical example to help illustrate these concepts and discuss any recent updates or changes in the taxation of ULIPs.
Table of Contents
Current Taxation Rules for ULIPs (Unit Linked Insurance Plans)
ULIPs are taxed under Section 10(10D) of the Income Tax Act. The key tax features of ULIPs are:
Premium Paid: The premiums paid on ULIPs are eligible for tax deductions under Section 80C, up to the maximum limit of ₹1.5 lakh per annum. This benefit is available if the premium does not exceed 10% of the sum assured. However, the tax deduction is available only if the policy meets the criteria set by the Income Tax Act, ensuring that it is primarily a life insurance product.
Taxation on Maturity: ULIPs are generally exempt from tax under Section 10(10D) when they mature. However, if the sum assured is less than 10 times the annual premium, the maturity amount becomes subject to tax under the head “Income from Other Sources” and is taxed as long-term capital gains (LTCG).
Tax on Withdrawals: ULIPs offer the flexibility to make partial withdrawals, but these withdrawals are taxable under the head "Capital Gains." The taxation depends on whether the holding period qualifies as long-term or short-term capital gains.
Capital Gains Tax on ULIP Maturity
The maturity amount of a ULIP, which includes the fund value and any bonuses, is typically tax-free under Section 10(10D), provided that the policy meets the conditions specified by the Income Tax Act.
However, if the sum assured is less than 10 times the annual premium, the maturity amount is considered taxable as long-term capital gains (LTCG). The taxation for such ULIPs works as follows:
Long-Term Capital Gains (LTCG): If the policy is held for more than 12 months, the gains are classified as long-term and taxed at 12.5% on profits exceeding ₹1.25 lakh, aligning ULIP taxation with equity-oriented mutual funds.
Short-Term Capital Gains (STCG): If the ULIP is surrendered or matures before completing 12 months, the gains are considered short-term and taxed at 20%.
This rule also applies to any redemption made during the policy term, making it important to consider the holding period when planning your ULIP investments.
Death Benefit and Partial Withdrawals
Death Benefit: The death benefit in a ULIP is generally tax-free under Section 10(10D), provided that the sum assured is at least 10 times the annual premium paid. The beneficiary receives the death benefit without any tax liability. If the sum assured is lower than 10 times the premium, the death benefit becomes taxable as capital gains.
Partial Withdrawals: ULIPs allow policyholders to make partial withdrawals, which are subject to capital gains tax. The tax treatment depends on the duration of the policy and whether the withdrawal qualifies as long-term or short-term capital gains.
Long-Term Capital Gains (LTCG): If the policy or fund units withdrawn have been held for more than 12 months, gains are classified as long-term and taxed at 12.5% without indexation on profits exceeding ₹1.25 lakh in a financial year.
Short-Term Capital Gains (STCG): If the units have been held for 12 months or less, gains are short-term and taxed at 20%.
Partial withdrawals made after the completion of the lock-in period (5 years) can also be considered tax-free if the sum assured is at least 10 times the annual premium.
Reporting ULIP Maturity and Capital Gains in ITR
When filing your Income Tax Return (ITR), it’s important to accurately report income from ULIPs to comply with tax regulations:
Maturity Amount: If the maturity amount is tax-free (the sum assured is 10 times the annual premium or more), there is no need to report the maturity amount in your ITR. However, if the policy does not meet these conditions and the amount is taxable, it should be reported under “Income from Other Sources” as capital gains.
Capital Gains on Withdrawals: If you have made any partial withdrawals during the year, you need to report the capital gains in your ITR. The taxation will depend on the holding period of the policy.
Long-Term Capital Gains (LTCG): If the ULIP units have been held for more than 12 months, the gains are taxed at 12.5% on the amount exceeding ₹1.25 lakh.
Short-Term Capital Gains (STCG): If the units are held for 12 months or less, gains are taxed at 20%.
Death Benefit: If you received a death benefit from a ULIP, it is generally exempt from tax. You do not need to report it in your ITR unless the sum assured was lower than 10 times the annual premium.
It's essential to keep track of your ULIP investments and any relevant details, such as premium payments, withdrawals, or death benefits received, to ensure that all income is reported accurately.
Practical Example
Let’s say you have a ULIP where the annual premium is ₹50,000, and the sum assured is ₹500,000. After holding the policy for 5 years, the fund value at maturity is ₹700,000.
Maturity Amount: Since the annual premium is ₹50,000 (below the ₹2.5 lakh threshold) and the sum assured is 10 times the premium, the maturity amount of ₹700,000 is tax-free under Section 10(10D). You do not need to report this amount in your Income Tax Return (ITR).
Partial Withdrawal: If you withdrew ₹100,000 from the policy after 6 years, the taxation depends on whether your ULIP annual premiums exceed ₹2.5 lakh. Since your premium is below ₹2.5 lakh, partial withdrawals are generally tax-exempt subject to policy terms.
However, if taxable (applicable for ULIPs with premiums exceeding ₹2.5 lakh), partial withdrawals will be treated as capital gains. If classified as long-term capital gains (units held for more than 12 months), gains above the cost basis will be taxed at 12.5%, replacing the earlier 10% rate. For example, if the gain portion on the ₹100,000 withdrawal is ₹50,000, then this ₹50,000 will be taxed at 12.5%, subject to the ₹1.25 lakh annual exemption limit on LTCG.
Death Benefit: If the policyholder passes away after 5 years, the death benefit of ₹500,000 will be paid to the nominee and is tax-free, assuming the sum assured is more than 10 times the annual premium.
Recent News and Updates
In recent news, the government has made certain updates to the taxation of ULIPs to make them more transparent and beneficial for taxpayers. One significant change is the tax treatment of ULIP proceeds, especially with regard to high-premium policies. ULIPs with annual premiums exceeding ₹2.5 lakh are now subject to capital gains tax, even if the sum assured is 10 times the premium. This change was introduced to curb tax avoidance schemes where high-premium ULIPs were used primarily as investment products rather than for life insurance purposes.
Additionally, the government has introduced more stringent reporting requirements for ULIP investments, particularly for those with high premiums. This ensures that such policies are not misused for tax evasion, keeping the focus on genuine life insurance products.
Conclusion
ULIPs continue to be an attractive option for investors seeking both life insurance and wealth creation. However, understanding the tax implications of ULIP investments is essential to ensure that you comply with tax laws and maximize the benefits. By being aware of the taxation rules on maturity, withdrawals, and death benefits, you can make informed decisions regarding your ULIP investments. As always, it’s recommended to consult a tax advisor to ensure that you are fully compliant with the tax rules and are optimizing your investment strategy for tax efficiency. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
Frequently Asked Question (FAQs)
Q1: Are ULIP premiums eligible for tax deduction?
Yes, the premiums paid towards a Unit Linked Insurance Plan (ULIP) are eligible for tax deductions under Section 80C of the Income Tax Act, subject to the overall annual limit of ₹1.5 lakh. ULIPs combine both insurance and investment, and the premiums paid towards these policies can be deducted from your taxable income. However, for the tax deduction to apply, the sum assured must be at least 10 times the annual premium amount. If this condition is not met, the tax deduction may not be available.
Q2: Is the maturity amount of a ULIP taxable?
The maturity amount from a ULIP is typically tax-free under Section 10(10D) of the Income Tax Act if the annual premium does not exceed ₹2.5 lakh during the policy tenure, regardless of the sum assured. This ensures that ULIPs continue to offer both investment and insurance benefits with tax exemption. However, for ULIPs where the annual premium exceeds ₹2.5 lakh in any policy year, the maturity amount becomes taxable as long-term capital gains (LTCG) under Section 112A. In such cases, the gains are taxed at 12.5% without the benefit of indexation (an update from the earlier 10% rate). Thus, the sum assured being 10 times the annual premium is no longer the primary criterion for tax exemption; instead, the premium threshold governs the tax treatment of ULIP maturity proceeds.
Q3: How are capital gains from ULIPs taxed?
Capital gains from ULIPs are now subject to long-term or short-term capital gains tax based on the holding period, with revised durations and tax rates. If the ULIP units are held for more than 12 months, the gains are classified as long-term capital gains (LTCG) and taxed at 12.5% without the benefit of indexation. If the ULIP is redeemed or partial withdrawals are made within 12 months, the gains are considered short-term capital gains (STCG) and taxed at 20%. This updated taxation applies to all proceeds from partial withdrawals, surrenders, and maturity of ULIPs where the annual premium exceeds ₹2.5 lakh, aligning ULIP taxation with equity-oriented mutual funds and other capital market instruments.
Q4: Is the death benefit from a ULIP taxable?
The death benefit received from a ULIP is generally tax-free under Section 10(10D) of the Income Tax Act, provided that the sum assured is at least 10 times the annual premium. This tax exemption ensures that the beneficiary of the ULIP receives the full death benefit without any tax liability. If the sum assured is less than 10 times the annual premium, the death benefit could be subject to tax, but this scenario is rare and typically applies to policies that do not meet the required conditions.
Q5: How should I report ULIP income in my ITR?
When filing your Income Tax Return (ITR), it is important to accurately report ULIP income, including capital gains from partial withdrawals, surrenders, and maturity proceeds. These capital gains should be reported under the appropriate sections for capital gains in the ITR, distinguishing between long-term and short-term gains according to the updated holding period of 12 months. For long-term capital gains (holding period exceeding 12 months), apply the tax rate of 12.5%, while for short-term capital gains (holding period 12 months or less), apply a tax rate of 20%. Additionally, ensure you clarify whether the maturity amount is tax-free (if annual premium is ₹2.5 lakh or less) or taxable under these provisions to maintain compliance under the revised tax regime.
Q6: Can I invest in multiple ULIPs to claim deductions?
Yes, you can invest in multiple ULIPs to claim deductions under Section 80C. The cumulative premium amount of all ULIPs will count towards the ₹1.5 lakh annual limit for tax deductions. However, you must ensure that the total sum assured across all ULIPs is at least 10 times the annual premium amount for each policy to remain eligible for tax benefits. If any of the policies do not meet this condition, their premiums may not be eligible for deduction.
Q7: Can I switch between different ULIPs within the same policy?
Many ULIPs allow policyholders to switch between various funds (equity, debt, balanced, etc.) as per their investment strategy. These switches typically do not have any immediate tax implications since they are treated as internal fund transfers within the same policy. However, it’s essential to note that such switches may incur administrative or fund management fees, and any gains realized from switching funds might be subject to capital gains tax if the policyholder decides to withdraw money later.
Q8: Are ULIPs a good investment option for tax savings?
ULIPs can be a good investment option for tax savings if you are looking for a combination of life insurance and market-linked investment. They offer the advantage of tax deductions under Section 80C, and the returns (if held for more than 3 years) are subject to favorable tax treatment as long-term capital gains. Additionally, ULIPs provide flexibility in fund allocation, allowing you to adjust investments based on market conditions. However, the high charges (administrative, fund management) can sometimes reduce returns, so it’s important to compare different policies before investing.
Q9: Can I claim tax benefits for ULIP premiums paid for my family members?
Yes, you can claim tax benefits under Section 80C for ULIP premiums paid for your spouse, children, or parents, provided the policies meet the necessary conditions (such as the sum assured being at least 10 times the annual premium). This allows you to reduce your taxable income by contributing to the financial security of your loved ones, making ULIPs a useful tool for both tax planning and financial protection.
Q10: Is it better to choose the old or new tax regime for ULIP investments?
The decision to choose the old or new tax regime depends on your overall tax planning strategy. Under the old tax regime, you can claim deductions for ULIP premiums under Section 80C, which can reduce your taxable income. However, under the new tax regime, these deductions are not available, and tax rates are lower. If your primary objective is to save on taxes through deductions, the old tax regime may be a better option, but if your income is relatively low and you do not benefit much from deductions, the new regime could be more advantageous.
Q11: What happens if I cancel my ULIP policy before 5 years?
If you cancel your ULIP policy before completing 5 years, you will likely face a surrender charge. The policyholder may receive a portion of the premiums paid as a refund, depending on the policy’s terms. The surrender value is generally lower than the amount invested, and the tax benefits you received may be reversed. If the policy is surrendered within 3 years, the capital gains on any withdrawals are considered short-term and will be taxed accordingly.
Q12: How does ULIP compare to other tax-saving instruments like PPF or NPS?
ULIPs offer a combination of insurance and investment, whereas instruments like the Public Provident Fund (PPF) or National Pension Scheme (NPS) focus mainly on long-term savings and retirement planning. While ULIPs provide flexibility in choosing investment funds and offer the potential for higher returns linked to market performance, PPF offers guaranteed returns with tax-free interest. NPS, on the other hand, provides tax benefits under both the old and new regimes and is focused on retirement savings. The choice between these instruments depends on your risk appetite, investment horizon, and the balance you want between insurance coverage and investment growth.
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