Individual investors are always in search of investment arenas that will provide them with protection against future uncertainties and give high returns. Unit Linked Insurance Plan- ULIP is one such investment where a portion of the investment is put aside for securing life and the rest is invested in funds. The funds can be equity-oriented, debt-oriented, or hybrid. Initially, Unit Trust of India (UTI) was the first ULIP introduced in 1971. It was followed by the Life Insurance Corporation (LIC) in 1989.
What is ULIP: Full Form and Meaning?
Unit Linked Insurance Plan abbreviated as ULIP offers a perfect combination of financial planning because for any investor the two main concerns are:
- Health and Term Insurance
- Equity investment
ULIP plan helps satisfy both the concerns mentioned above. Moreover, the investor can claim the deduction under Section 80C. The Insurance Regulatory and Development Authority (IRDA) of India regulates the ULIP plan.
In the budget 2021, the Finance Minister announced that proceeds from the ULIP plan (amount receivable at the time of maturity of the policy) will be taxable if the annual premium exceeds INR 2.5 lakh in any given year of the policy’s term.
How ULIP Plans Work?
ULIPs offer life insurance coverage along with an opportunity to invest in a variety of market funds including stocks, debt, or a combination of both. The premium paid towards the policy is invested in such funds as per the risk appetite of the investor.
The insurance firm invests a portion of the premium into equity markets while the rest provides insurance coverage. There are fund managers who keep track of the investment.
ULIPs give the flexibility to switch between debt and equity-oriented portfolios. This enables the policyholder to maximize their returns by switching between their investments when the market conditions are favourable.
What is the Lock-in Period?
The lock-in period of ULIP is usually 5 years. However, the policyholder should at least hold the policy for 15 years or more since ULIP is a combination of insurance and investment and both of them are considered long-term investments.
What are the different types of ULIPs?
In India, various types of ULIP plans are available based on the policyholder’s risk appetite and end investment objective. Below are the types of ULIPs based on such criteria:
ULIPs Based on Funds
- Equity-Oriented Funds: Under these ULIPs, the investment is majorly in high-risk equities.
- Debt-Oriented Funds: Here, ULIPs invest in debt instruments such as debentures, corporate bonds, Government bonds, securities, and fixed-income bonds.
- Balanced Funds: These Unit Linked Insurance Plans are a combination of both equity and debt. Here the investments are partly in equity-oriented funds and partly in fixed-income debt instruments.
- Cash Funds: These are the ULIPS where the investment occurs in cash and bank deposits, money market funds, and other money market instruments.
Based on Creating Wealth
- Guarantee/Non-Guarantee: The main aim of Guaranteed ULIPs is capital preservation. Therefore, they invest a small proportion in equities, to avoid market risk. Under Non-Guarantee, the main aim is to maximize wealth creation and therefore, a large proportion is invested in the equity market. Hence, non-guarantee ULIPs have larger yields but are riskier as a result.
- Single-Premium and Regular Premium: Under single-premium ULIPs, an investor has to pay the premium only once. This takes place during the time of purchase. On the other hand, for regular premium ULIPs, you have to pay the premium monthly, quarterly, semi-annually, or annually as you choose to do so.
- Life Stage based: Life-staged ULIPs operate with the thought process that the risk appetite of individuals reduces as they grow old. Hence, ULIPS under these categories increase their investment in debt instruments and reduce the proportion of investment in equity-oriented funds as the investors grow old.
Based on the End Use of the Fund
- Wealth Creation: This type of ULIP helps in creating a corpus of funds that you can use to fulfil your future financial goals.
- Funding Children’s Education: Investing under these schemes ensures the future needs of your children and other unforeseen circumstances.
- For Retirement: Retirement-centred ULIPs are those that focus on building a corpus that you can utilize during your retirement.
Taxation on ULIPs
Premiums paid towards ULIP are eligible for deduction under section 80C up to a maximum of INR 1.5 lakhs during a financial year.
Although, before the announcement of the Union Budget 2021, ULIP used to fall under the EEE (Exempt, Exempt, Exempt) category. However, the FM proposed certain changes that will affect the taxation of ULIP. Below are the major changes:
- The total or annual premium that is payable towards ULIP that is not extending INR 2,50,000 is only eligible for the EEE category.
- A capital gains tax is proposed for ULIPs similar to equity-oriented mutual funds, where a tax will be levied at 10% on returns exceeding INR 1,00,000. This will apply to ULIPs that are not covered above and subscribed to on or after February 1, 2021. (Since the lock-in period is more than 12 months, LTCG will be levied on ULIPs)
- Security Transaction Tax (STT) is also proposed to be levied on unit-linked insurance plans issued by such insurance companies on or after February 1, 2021. This STT will be levied on the sale, surrender or redemption of a unit of an equity-oriented fund to the insurance company, on maturity or partial withdrawal.
The below table summarizes ULIP taxation before and after the 2021 budget announcement:
Example of taxability on ULIP
Case: On April 1, 2022, Ankit purchased a ULIP policy assuring a sum of INR 25 lakhs on which he pays a premium of INR 2 lakhs every year during the term of the policy. On June 1, 2022, he purchased another policy assuring a sum of INR 10 lakhs on which he pays a premium of INR 1 lakh every year during the term of the policy.
Solution: Ankit has purchased two ULIP policies, both after February 1, 2021, hence, the maturity proceeds of the policies will be exempt u/s 10(10D) only if the premium paid for a single policy as well as the aggregate premium paid on both the policies do not exceed INR 2,50,000 in any year during the term of the policy.
Policy | Premium | Taxability on the Maturity Proceeds |
Policy 1 (01/04/2022) | 2 lakh | Exempt u/s 10(10D) |
Policy 2 (01/07/2022) | 1 lakh | Net income taxable under Capital Gains |
Note: Ankit can choose to avail of exemption in respect of any one of the two policies. He cannot claim the exemption in respect of both policies because the aggregate premium exceeds the limits specified. Hence, It is advisable to claim the exemption in respect of the first policy as the maturity proceeds (i.e. INR 25 lakhs) are higher than the maturity proceeds of the second policy (i.e. INR 10 lakhs).
What are the Benefits of Investing in ULIP?
Investing in ULIPS can have many advantages, some of which are as follows:
Life Insurance: ULIPs provide life insurance coverage along with investment opportunities. This is a dual advantage that the investor can claim from this policy.
Flexibility: The markets have been ever-changing and volatile. To deal with the same ULIPs provide the flexibility to switch the schemes. The investor has the option to switch between equity and debt depending upon market volatility and risk appetite.
Long-Term Goals: ULIPs come with a lock-in period of 5 years making them suitable for achieving long-term goals. An investor can invest in ULIPs to achieve long-term goals like children’s education, marriage, and buying a car or house. Additionally, individuals who invest in ULIP generally invest for a longer period to reap the benefits of the market.
Tax benefits: Investor can claim a deduction under section 80C on the premium amount paid up to INR 1.5 lakhs.
ULIP vs Mutual Fund
Mutual funds and ULIPs have long been regarded as two of the better-performing assets for wealth creation. A comparison between ULIP & Mutual Funds is shown below:
Criteria | ULIPs | Mutual Funds |
Scope | Investment as well as insurance product | Investment product |
Withdrawal | There is a lock-in period of 5 years as it is a long-term investment | Anytime withdrawal |
Liquidity | Limited liquidity | High liquidity |
Tax Benefit | Tax deduction under section 80C | No tax benefits |
Switching between funds | Altering between funds is permissible | Switching is not permissible; the only way to reduce the risk is to exit which may lead to capital gains tax |
ULIP vs ELSS
Criteria | ULIP | ELSS |
Tax Benefit | A deduction can be claimed under section 80C | A deduction can be claimed under section 80C |
Taxation | Gains more than INR 1 lakh in a given financial year are taxable under LTCG @10% | Charges are simple and easy to understand: Approximately, on average Expense Ratio ranges from 1.05% to 2.25% |
Lock-in period | 5 Years | 3 Years |
Risk | High Risk | Moderate Risk |
Underlying Asset | Equity, Debt, and Balanced | Equity |
Charges | Below are the major charges associated with ULIP: Mortality Charge, Premium Allocation Charge, Switching Charge, Surrender Charge, Policy Administration Charge, etc. | Charges are simple and easy to understand: Approximately, on an average Expense Ratio ranges from 1.05% to 2.25% |
FAQs
The lock-in period in the Unit Linked Insurance Plan is 5 years.
If an individual changes their mind then usually there is a free look-in period of 30 days.
Yes, investors have the freedom to change from one fund to another at any point in time.
Yes, the insurance cover is immediately discontinued if premiums are not paid within the first 3 years of the policy. For premiums not paid after 3 years, upon paying surrender value, the contract is terminated.
Yes, the policyholder can surrender their ULIP after paying the surrender charges.
Yes, a Top-up facility is provided depending on the features of the ULIP scheme that the investor has availed.
Let’s understand ULIP Taxation better with the help of some more examples.
Example 1:
On March 1, 2012, Mr. Patel purchased a ULIP policy assuring a sum of ₹20,00,000, on which he paid a premium of ₹3,00,000 every year during the term of the policy. He received the maturity amount on March 31, 2022. What shall the tax implications?
Solution:
Mr. Patel purchased the policy on March 1, 2012, i.e, before April 01, 2012. Since the premium paid by him (i.e. ₹3,00,000) is less than 20% of the sum assured (i.e. ₹4,00,000), the maturity proceeds of ₹20,00,000 received by him will be exempted u/s 10(10D) and no tax will be levied on the same. He is also eligible to claim a deduction u/s 80C up to ₹1,50,000.
Example 2:
Mr. Kapoor purchased a ULIP policy on June 30, 2012, and paid a premium of ₹2,00,000 every year during the term of the policy, on a sum assured of ₹15,00,000. He received maturity proceeds of the same on June 30, 2022. What shall the tax implications?
Solution:
Mr. Kapoor purchased the ULIP policy after April 01, 2012.
Here, the premium paid (i.e. ₹2,00,000) exceeds the limit of 10% of the sum assured (i.e. ₹1,50,000), hence the maturity proceeds received by him will be taxable under the head Income from Other Sources and taxed at slab rates. He is also eligible to claim a deduction u/s 80C up to ₹1,50,000.
I bought a “UTI” ULIP in 2007 and it matured in April 2022, my sum insured for the same was around 5 lakh and I have been paying a premium of 32k every year from 2007 till 2019. And I got some bonus units in Jan 2022. How will it be all taxed including the bonus?
Hi @Walker
Since the policy is taken before 1 April 2012 and the premium paid every year (i.e. ₹32,000) is less than 20% of the sum assured (i.e. ₹1,00,000), the maturity proceeds received will be exempted u/s 10(10D) and no tax will be levied on the same. You’re eligible to claim a deduction u/s 80C up to ₹1,50,000.
This will be taxed under income from capital gains.
to make one thing clear which I didn’t mention earlier was the ULIP plan was UTI ULIP, now are there any other taxes applicable or it will be same ?
Hi @Walker
The taxability shall not differ for a UTI ULIP.
No there is no other tax applicable.
Hi @Sanyam_Kumar
Since the annual premium paid for the ULIP does not exceed 2.5 lakhs during the term of the policy, then the amount received including the bonus will be exempt at the time of redemption.
You can show it under exempt income under IFOS.
we have invested in ULIP life insurance - ICICI Pru elite super . it was funded from NRE account which was started in 2018. when this was surrendered recently they have deduced TDS and repaid balance amount. generally there should be any tax for an NRE account. one point the premium paid is more than 10% of sum assured. let me know if we can reclaim this TDS amount
Hey @Fazlu,
The amount received from the LIC is taxable if the premium paid is more than 10% of the sum assured. You can claim this TDS as a tax credit while filing your ITR. If the total tax payable is less than the TDS paid, the difference amount will be issued as a refund.
Hope this helps!
we can claim because i am not liable to pay TDS as an NRE if i don’t have any other tax liability…
Hey @Fazlu,
As mentioned previously, if the total tax payable is less than the TDS paid, the difference amount will be issued as a refund.
Hope this clarifies.