This is last month of the financial year and most of the tax payers will rush to buy the product which gives them tax deduction as well as higher returns compared to Bank FDs & other traditional products. Most of the time tax payers take late decision to finalise tax planning, which results in wrong investment. Single premium ULIPs are aggressively sold as tax cum investment option compared to bank FDs or mutual fund products. Most of the investors buy without knowing tax implication of the products. These products are highly missold in the market as far as tax laws are concern. General belief is that when you invest in insurance policy you get tax dedication u/s 80-C and also maturity proceeds will be tax free u/s 10 (10) (D) of the income tax act. But, this is no true as far as single premium plans are concerned. Let us understand the IRDA guidelines for the single premium plan and also Income tax provisions related to tax deduction and exemption available to insurance products.
IRDA guidelines say that all the ULIP plans other than pension plans shall provide minimum mortality (life) cover. The minimum life cover shall be 125% of the single premium for age at entry below 45 years and 110% of single premium for age at entry of 45 years and above. This is the minimum requirement and no insurance product can be launched without having minimum life cover as stated above. The maximum can be higher than this and every company is free to decide its own set of rules for the same. Normally company’s offer maximum five times of single premium as maximum cover. Single premium ULIP plans gives the flexibility to choose the life cover between minimum and maximum cover as per plans features. Mostly these plans are sold with minimum life cover to show higher returns in the plan. If you opt for higher multiplier for life cover than you have to pay extra mortality charges and the same will reduce your overall returns. Agents smartly sell these plans on the basis of returns to avoid competition from other traditional and mutual fund products. These plans may give higher returns compared to other traditional investment like bank FDs, Postal Schemes or even PPF. But one also needs to check the tax rules before finalizing the single premium plans.
The income tax rules on the other hand says that to claim tax deduction u/s 80-C, your insurance premium shall not be more than 20% of the actual sum assured i.e. life cover opted in the plan. This means if you are buying a policy of 1 lakh sum assured than your annual premium should not exceed Rs. 20,000 per year. If your premium is higher than 20% than deduction shall be restricted to Rs. 20,000 only. On the other hand section 10(10)(D) says life insurance maturity value shall be tax free only if the premiums payable does not exceed 20% of the sum assured. It clearly means that if your premium is more than 20% of the sum assured than maturity proceeds shall not be tax free. The maturity amount automatically becomes taxable even it is received from life insurance company. I think income tax authorities must intervene and stop these types of policies wrongly sold in the market with tax benefits. The same also applies to the top up premium paid in the regular ULIP plans.
The premiums in single premium plan which are sold with minimum sum assured always exceeds 20% of the sum assured and hence are likely to be taxable in the hands of policy holder at the time of maturity. There are some plans which covers you five times of single premium in first year but sum assured reduces to 1.25% from second year onwards. There is no clarity in these types of products as far as tax laws are concern. But one should be careful before buying the same. It is always advisable to prefer Mutual Fund ELSS Schemes compared to single premium ULIPs as they are also eligible for tax deduction and are also tax free in the hands of investor. One should also note that there is a 3 year lock in period in ELSS scheme compared to 5 years in insurance ULIP plans.
