Unit-Linked Insurance Plans (ULIPs) are a popular financial instrument in India, blending the benefits of investment and insurance. As a tax-saving option, ULIPs offer several advantages under the Income Tax Act, 1961. Let’s take a look at some of the tax benefits associated with ULIPs, which can help you make an informed decision about incorporating them into your financial planning.
The Basics of ULIPs
A Unit-Linked Insurance Plan (ULIP) is a product combining life insurance with investment. The premium paid towards a ULIP is allocated into different fund options, including equity, debt, or a combination of both, based on the policyholder's preference. The dual benefit of life cover and investment returns makes ULIPs a versatile financial tool.
Tax Benefits of ULIPs
ULIP tax benefits can be availed of at multiple stages – premium payment, accumulation, and withdrawal. Here’s a detailed breakdown of the tax benefits.
1. Tax Deduction on Premiums Paid:
Under Section 80C of the Income Tax Act, 1961, premiums paid towards a ULIP qualify for tax deduction of up to ₹1.5 lakh per annum. This deduction is applicable only if the premium does not exceed
- 10% of the sum assured (policy taken on or after 01/04/2012)
- 20% of sum assured (policy taken up to 31/03/2012)
- 15% of sum assured (policy taken on or after 1/04/2013 by person who is disable or suffering from severe disease.
For example, if the sum assured is ₹10 lakhs, the annual premium eligible for deduction should not exceed ₹1 lakh.
It is to be noted that the said deduction is available only in old tax regime.
2. Tax Exemption on Death Benefits:
The death benefit received by the nominee is exempt from tax under Section 10(10D) of the Income Tax Act. This ensures that the family of the policyholder receives the full sum assured without any tax liabilities, providing financial security during unforeseen circumstances.
3. Maturity Benefits:
While the premiums and death benefits are exempt from tax, the maturity benefits of ULIPs are exempt as per Section 10(10D) subject to the satisfaction of terms and conditions as may be prescribed therein and provided that the premium does not exceed:
- 10% of the sum assured (policy taken on or after 01/04/2012)
- 20% of sum assured (policy taken up to 31/03/2012)
- 15% of sum assured (policy taken on or after 1/04/2013 by person who is disable or suffering from disease)
However, nothing of above shall be applied if the amount of premium payable for any of the previous year during the term of such policy exceeds 2.5 lakhs rupees for ULIP policy issued on or after 01/02/2021. These proceeds from the maturity of a ULIP shall be taxable.
ULIP as a Tax-Saving Option
ULIPs stand out among various tax-saving schemes due to their dual benefits. Here’s why ULIPs are considered a robust tax-saving option.
Combination of Insurance and Investment:
ULIPs provide a life cover alongside the potential for wealth creation through market-linked returns.
Flexible Investment Choices:
Policyholders can choose from a range of funds based on their risk appetite, including equity, debt, and balanced funds.
The tax benefits on premiums and death benefits make ULIPs an attractive choice for long-term financial planning.
What to Consider Before Investing in ULIPs
While ULIP tax benefits can help you significantly in your financial planning, there are a few critical points to keep in mind:
- Lock-in Period: ULIPs come with a mandatory lock-in period of 5 years. Premature withdrawals are not permitted during this period.
- Charges and Fees: ULIPs have various charges, including fund management fees, policy administration charges, and mortality charges, which can impact the overall returns.
- Market Risk: As ULIPs are linked to the market, the returns are subject to market fluctuations. It’s essential to evaluate your risk tolerance before investing.
Maximising Tax Benefits with ULIPs
To make the most of the ULIP tax benefit, consider the following strategies:
- Long-Term Investment: Given the lock-in period and market-linked nature, ULIPs are best suited for long-term financial goals such as retirement planning or a child’s educational needs.
- Optimal Premium Payment: While buying a policy, one can ensure that the annual premium does not exceed 10% of the sum assured to optimise tax deductions.
- Regular Monitoring and Fund Switching: ULIPs offer the flexibility to switch funds based on market conditions. Regularly monitoring your investment and making informed switches can enhance returns and reduce risk.
Other Tax-Saving Options
ULIPs can be compared with other popular tax-saving options available under old tax regime to understand their unique benefits.
- Equity-Linked Savings Schemes (ELSS) also provide tax benefits under Section 80C, with a deduction limit of ₹1.5 lakh. ELSS funds have a shorter lock-in period of 3 years and are equity-linked, which implies high market risk but the possibility of substantial returns due to stock market investments.
- Public Provident Fund (PPF) is another tax-saving scheme offering benefits under Section 80C. The interest earned on PPF investments is tax-free, making it an attractive choice for risk-averse investors. However, PPF comes with a long lock-in period of 15 years, reflecting its status as a government-backed, low-risk investment.
- National Savings Certificate (NSC) offers tax benefits under Section 80C, up to the standard ₹1.5 lakh limit. NSC has a lock-in period of 5 years and is considered a low-risk investment due to its government backing.
Unit-Linked Insurance Plans offer a unique blend of investment and insurance, making them a compelling choice for individuals looking to maximise their tax benefits. By understanding the ULIP tax benefit structure and aligning your investments with your financial goals, you can optimise your returns while ensuring adequate life cover. As with any financial product, it’s crucial to assess your risk tolerance, investment horizon, and financial objectives before committing to a ULIP plan.
** Tax exemptions are as per applicable tax laws from time to time.
Disclaimers:
Unit Linked Insurance Products are different from the traditional insurance products and are subject to risk factors. The Premium paid in unit-linked life insurance policies are subject to investment risks associated with capital markets and NAVs of the units may go up or down, based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. IndiaFirst Life Insurance Company Limited is only name of the Insurance Company and _________________ (UIN__________) is only the name of the Unit Linked Life Insurance contract and does not in any way indicate the quality of the contract, its future prospects, or returns. Please know the associated risks and the applicable charges from your Insurance Agent or the Intermediary or policy document issued by the Insurance Company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. For more details on risk factors and terms and conditions, please read the sales brochure carefully before concluding the sale.
IndiaFirst Life Insurance Company Limited, IRDAI Regn No.143, CIN: U66010MH2008PLC183679, Address: 12th & 13th floor, North [C] Wing, Tower 4, Nesco IT Park, Nesco Center, Western Express Highway, Goregaon (East), Mumbai – 400 063. Toll free No – 1800 209 8700. Email Id:customer.first@indiafirstlife.com, Website :www.indiafirstlife.com, Fax No. +91226570600. Trade logo displayed above belongs to our promoter M/s Bank of Baroda and is used by IndiaFirst Life Insurance Co. Ltd. under license. Adv. Ref. No.:_________.
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