ULIP and its Tax Implications

In the wake of Union Budget proposal to tax ULIP investments beyond a threshold, let us understand ULIPs along with likely tax implications.

What is Unit Linked Insurance Plan?

An ULIP is basically a blend or mix of life insurance and investment vehicle. This product enables policyholders to make regular premium payments for a chosen period, portion of which take care of the insurance cover i.e. mortality charges, while balance premium gets invested in equity and/or debt funds, much like a mutual fund. A policyholder gets the option of choosing pure equity, pure debt, hybrid funds or dynamic allocation based on investment needs and risk profile. Each policyholder is allocated number of units out of the investment amount at the prevailing NAV that is calculated on daily basis. Since multiple options of investment based on risk profile are available, NAV for each fund varies depending upon market conditions and fund performance.

Benefits of ULIP Investment

Investors could reap the benefits of ULIP investment when time horizon is in excess of 10-15 years. IRDAI has enhanced the lock-in period, in 2010, from 3 years to 5 years. ULIP investment provides life cover besides an opportunity to earn market linked returns. Investors could consider ULIP investment by choosing premium payment term for attainment of long term goals like child education, child marriage, buying a vehicle, purchasing dream home, overseas vacations and retirement planning. The flexibility of switching investment from equity to debt or vice-versa or opting for dynamic allocation i.e. partially in equity and rest in debt or other way round aid knowledgeable investors in taking advantage of equity and bond market movements.

Applicable Charges

Unlike traditional insurance plans, ULIP plans have applicability of charges namely, mortality charges, premium allocation charges, policy administration charges, switching charges beyond limited number of free switches, surrender or withdrawal charges. If there is guaranteed payment option offered under the plan then guarantee charges would be applicable.

Taxation Aspects

The first and foremost tax benefit is exemption available, under section 80C of IT Act, 1961, to the extent of maximum Rs 1.5 lakh per annum. Maturity proceeds of ULIPs are exempt, under section 10(10D), from income tax provided premium payable does not exceed 10% of the sum assured. If the premium payable exceeds 10% of the sum assured then maturity proceeds are taxable in the hands of investors. Further, section 80C benefit stands reduced to 10% of the premium payable in all such cases.

The Union Budget has proposed taxing ULIP investment in an attempt to bring it at par with Mutual Fund investment when premium payable for any year exceeds Rs 2.5 lakh then any gains would be treated as long term capital gain with applicable tax @10%, in line with MF capital gains.

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