Definition
A Unit Linked Insurance Plan (ULIP) is an integrated product combining life insurance protection with market-linked investment, regulated by the Insurance Regulatory and Development Authority of India (IRDAI) under the IRDAI (Linked Insurance Products) Regulations, 2013. Premium payments are split: a portion covers the cost of insurance (mortality charges), and the remainder is invested in the policyholder's chosen funds (equity, debt, balanced, or liquid). IRDAI mandates minimum sum assured multiples and caps charges. NRIs can purchase ULIPs subject to FEMA repatriation rules and the insurer's NRI policy acceptance norms.
How it works
Premium net of charges is allocated to fund units at current NAV. Policyholders may switch between funds (limited free switches per year). The mandatory lock-in is 5 years (IRDAI circular 2010); surrender before completion results in funds held in a discontinued policy fund at 4%, with proceeds payable only after the lock-in. Death benefit is the higher of fund value or sum assured. Charges include: premium allocation charge, policy administration charge, fund management charge (≤1.35% p.a. per IRDAI cap), and mortality charge. IRDAI's standard benefit illustration requirements apply to all ULIP sales.
Tax treatment
Premiums up to ₹1.5 lakh/year qualify under Section 80C. Maturity proceeds are exempt under Section 10(10D) if annual premium is ≤10% of sum assured (≤15% for policies issued before April 2012). Finance Act 2023 amendment: for ULIPs issued on or after 1 February 2021, proceeds are taxable as capital gains if aggregate annual premium exceeds ₹2.5 lakh — treated as equity capital gains (STCG 20%/LTCG 12.5%). Death proceeds remain fully exempt under Section 10(10D) without premium cap. TDS applies on maturity proceeds for NRIs under Section 195.
Worked example
Kavya, aged 35, takes a ULIP at ₹1 lakh annual premium for 20 years (sum assured ₹10 lakh — 10x premium, within 10(10D) threshold). After effective charges (~2%), she earns 9% p.a. gross. Fund value at maturity: ≈₹45.6 lakh — fully exempt under Section 10(10D). Cumulative tax savings at 31.2% on ₹1 lakh/year over 20 years: ₹6.24 lakh. Total benefit: ≈₹51.8 lakh on ₹20 lakh invested, with continuous life cover throughout the premium-paying term.
See also
- NPS — National Pension System
- AIF — Alternative Investment Fund
- EPF — Employees' Provident Fund
- Insurance Planning for NRIs
- IRDAI — Insurance Regulatory and Development Authority of India
Primary source
IRDAI (Linked Insurance Products) Regulations 2013 — irdai.gov.in
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