Planning and filing taxes in advance is the best way to reduce one’s tax liability and strengthen their financial position. By having a well-planned strategy in place, one can avail tax benefits, claim deductions, exemptions, rebates and relief under various Income Tax Acts and provisions. This will help the individual and their family enjoy their income without losing out too much of it to taxes.
What is a ULIP Plan?
Unit Linked Insurance Plans (ULIPs) are offered by life insurance companies as financial instruments that provide tax saving benefits. In this plan, a part of the premium paid by the policyholder is taken for the insurance cover and the remaining amount is subsequently invested in various debt and equity schemes. ULIP investments offer the flexibility to the policyholder for selecting the type of funds or investment strategies they want to invest in.
Life insurance plans offer life coverage but do not help in wealth creation and growth in savings, whereas mutual funds give good returns but offer no insurance benefits. A ULIP policy is a perfect combination of the two as it bridges the gap between protection and wealth creation. It also gives an added advantage of higher tax savings and tax-free withdrawals on maturity or partial withdrawals. This is because the premium paid by policyholders towards a ULIP is eligible for tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Not only this, but the returns that policyholders get on maturity of the plan is also exempted from income tax Section 10D of the Income Tax Act.
Deriving Benefits from your ULIP Policy
To derive these dual benefits from ULIP investments, policyholders must remember to continue their policy for at least five years and make sure that their premium amount should be less than 10% of the total sum assured to avail tax exemption when the policy matures. Thus, ULIPs are market-linked investment instruments that provide protection from tax on long-term capital gains, helping investors to make the most of their income.
In case of an untimely death of the policyholder, the family of the deceased receives not just the sum assured, but the returns generated by the ULIP policy as well. This offers monetary security for the family to fall back on during emergencies and this pay-out is also exempted from income tax rules. In case of other financial emergencies when policyholders urgently need to make partial withdrawals, ULIPs assure investors by keeping the withdrawals tax-free, provided the withdrawal amount does not exceed 25% of the policyholder’s fund value. ULIP plans have a five-year lock-in period that gives long-term tax benefits as investors can save their taxes for five consecutive years on their insurance premiums.
Due to this five-year lock-in period, the net returns on ULIP investment are higher than money being saved in a savings account or in a fixed deposit account. Having a longer time horizon for this plan reaps many more benefits as the policyholder’s money gets compounded. Moreover, since it is exempted from tax, investors stand to gain more. With the flexibility to switch investments between debt and equity in the portfolio, policyholders can glean more information and knowledge about market performance and increase their risk appetite accordingly. ULIPs are very beneficial for accumulating a good tax-free amount to fulfil one’s long term financial goals like buying a house or a new car, marriage and higher education.
Making ULIPs part of your investment plans
A ULIP policy is one of the best tax-saving instruments in these current times for it has all investor friendly features like diversification, wealth accumulation, value appreciation, flexibility and reliability of investments coupled with attractive tax savings. It is the perfect opportunity to insure oneself and the family’s future with minimal risk of losses and other market complications. It should be an integral part of every individual’s financial planning strategy in today’s unprecedented times.
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