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Check out: Tax treatment of ULIPs

Arnav Pandya

Unit linked insurance policies or ULIPs have been extremely popular among investors over the past many years. While features and performance of the policies is one aspect there has to be some attention paid to tax angle too.

There are two areas related to the tax angle and this deals with the benefits at the time of investment and those at the time of maturity. In case of unit linked insurance plans these are considered as life insurance policies and hence there is a benefit that is visible both at the time of the investment and also when the proceeds are received from the policy.

Tax deduction

There is the benefit of a deduction of tax that is available for premium paid on life insurance policies under Section 80C of the Income Tax Act. This section allows a deduction upto Rs 1 lakh from the taxable income of the individual if the investment is in specified instruments.

The idea for the investor should be to complete this required investment each year so that the maximum benefits can be realised.  To complete this requirement the tax payer will be able to pay the premium on the ULIP and this will qualify for a tax deduction under Section 80C of the income tax act. The premium that is paid on the policy will be added to the other eligible investments to get an idea of the total benefits.

Payout on the policy

There are two ways in which a payout is possible on a ULIP. The first is in the case of death of the policyholder and the amount received by the nominees at this time is totally tax free in their hands. Hence there is no tax impact that is witnessed when the benefit is received at the time of the death of the policyholder.

On the other hand if there are proceeds received from the ULIP in case of maturity of the product then this will be classified as a payout from the insurance policy under Section 10 (10D) and the entire amount here will also be tax free in the hands of the receiver. This also proves to be a great benefit as far as the individual investor is concerned and hence they will benefit from the situation.

Even though there are investment features in a ULIP and the investments could be in debt or even equity the amount received from this at the time of maturity is tax free in the hands of the receiver. This proves to be a big benefit as far as the overall policy is concerned. 

Arnav Pandya can be reached at arnavpandya@hotmail.com

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