Understanding Exempt-Exempt-Exempt Tax Benefits on ULIPs

Unit Linked Insurance Plans (ULIPs) offer a combination of investment and insurance in a single product. Apart from potential market-linked returns, one of the key benefits of ULIPs lies in their favourable tax treatment. This guide explains the taxability of ULIP, especially on maturity, and how you can claim ULIP tax exemption under Indian tax laws.

ULIPs qualify for Exempt-Exempt-Exempt (EEE) status, which means:

1. Premiums Paid: Eligible for deduction under Section 80C of the Income Tax Act (up to ₹1.5 Lakhs per financial year).

2. Returns Earned: No tax during the accumulation phase.

3. Maturity Amount: In many cases, ULIP maturity tax is exempt under Section 10(10D).

This makes ULIPs one of the few financial instruments that offer tax benefits at all stages.

The taxability of ULIP on maturity depends on the premium amount and issue date of the policy:

1. ULIPs Issued Before 1 February 2021

• The entire ULIP maturity amount is tax-free, provided the premium does not exceed 10% of the sum assured.

• Section 10(10D) grants full exemption from income tax.

2. ULIPs Issued On or After 1 February 2021

• If the annual premium exceeds ₹2.5 Lakhs, tax on ULIP maturity is applicable.

• Gains exceeding ₹1 Lakhs from such ULIPs are taxed at 10% under long-term capital gains.

• However, if total premiums across all ULIP policies stay within the limit, maturity proceeds remain tax-exempt.

To ensure ULIP tax exemption under Section 10(10D):

• The policy must have a minimum lock-in of 5 years

• The annual premium should not exceed ₹2.5 Lakhs (for policies issued after 1 Feb 2021)

• The sum assured should be at least 10 times the annual premium

1. Premium Deduction

Premiums paid towards ULIPs qualify for deduction under Section 80C (up to ₹1.5 Lakhs).

2. Partial Withdrawals

After the 5-year lock-in, partial withdrawals from ULIPs are tax-free.

3. Maturity and Death Benefit

• Is ULIP maturity amount taxable? Usually no, if conditions under Section 10(10D) are met.

• Death benefit received by the nominee is always tax-free.

Unlike mutual funds that are subject to LTCG (Long Term Capital Gains), ULIPs can be tax-free at maturity if they meet specified conditions. This gives them a unique advantage in tax planning.

Let’s say you purchased a ULIP on 1 March 2022 with an annual premium of ₹3 Lakhs.

• Since it exceeds the ₹2.5 Lakh limit, ULIP maturity tax will apply.

• If your investment grows to ₹20 Lakhs at maturity, gains above ₹1 Lakhs will be taxed at 10%.

• Taxable amount: ₹19 Lakhs; Tax payable: ₹1.9 Lakhs

However, if your premium is within the prescribed limit, no tax applies on maturity.

Bajaj Allianz ULIP plans, available on Bajaj Markets, also come with significant tax benefits. The regular premiums paid to fund ULIPs, the partial withdrawals that may be collected at regular intervals, and the fund received at the maturity of the plan are all tax-exempt. These triple tax exemptions classify ULIP plans as EEE(exempt exempt exempt).

Below are the three ways in which a Bajaj Allianz ULIP plan, available on Bajaj Markets, can help you save on taxes.

• ULIP Premium tax deductions: The premiums paid towards funding a ULIP plan are tax-deductible up to 1.5 Lakhs under Section 80C of the Income Tax Act. That is, the cumulative premiums paid for ULIP plans can be deducted from your annual income to arrive at a lower taxable income figure. This will reduce your tax burden, and may help you transition to a lower tax slab all-together.

• ULIP partial withdrawals: The feature of partial withdrawals in ULIPs further empowers policyholders to deal with emergencies of all kinds and be able to afford a necessary house renovation or an exotic family vacation. ULIPs have a lock-in period of 5 years after which the policy-holder can withdraw sums of money according to his/her needs or goals. The partial funds withdrawn from a ULIP corpus are completely tax-free. This frees up the policyholder to attend to his/her necessities and even indulge a little - all without adding to their tax burden.

• ULIP Maturity Fund: Under Section 10(10D) of the Income-tax Act, the corpus collected over the lifespan of a ULIP plan is exempt from taxes. The amount collected by the policyholder upon the maturity of a fund comes with no tax liabilities. Thus the enviable ULIP returns from your long and intelligent investment plans are not eroded through further taxation.

   

In this manner, ULIPs can provide you with the best of both worlds, high returns and umpteen tax benefits.

Let’s look at three Bajaj Allianz ULIPs available on Bajaj Markets that can help you achieve specific goals while growing your long-term wealth.

• Bajaj Allianz Child Plan: This plan safeguards your child’s education from future inflationary shocks, increasing tuition fees, or unfortunate incidents. Moreover, under Section 80C, 80CCC and 80CCD of the Income Tax Act, Bajaj Allianz ULIP Child Plans, help you enjoy ULIP tax benefits thrice over.

• Bajaj Allianz Long Life Goal ULIP: A hike in the number of nuclear families, an increase in life expectancy and insufficient savings have contributed to the urgent need for retirement plans. This retirement plan ensures your independence even in your retirement. With the power of compounding, you can accumulate a significant corpus of savings to last you a lifetime.

• Bajaj Allianz Investment Plans: These plans are geared for maximum returns on investments for policy-holders. You can invest in the top-rated funds and benefit from returns as high as 25% over a 5-year investment period.

ULIPs offer unique advantages when it comes to tax planning. If you're seeking long-term investment options with insurance cover and tax relief, understanding the ULIP tax benefit framework is crucial. Knowing the taxability of ULIP on maturity can help you optimise your returns and avoid unexpected liabilities. Ensure your policy meets all eligibility conditions to enjoy full ULIP tax exemption.

Tax rules are subject to change. Always consult a financial advisor or check with official sources before making investment decisions based on tax treatment.