7 Things to Know About the Tax Benefits of ULIPs

Nowadays, Unit Linked Insurance Plan i.e., ULIPs have evolved as a popular investment instrument in India that helps you save tax on paid premiums. They also play an important role in financial planning. ULIPs not only provide coverage but also helps in investing your money for fulfilling the wealth creation goals. With the help of these plans, you can invest in a combination of debt and equity funds, thus provides good returns.

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Apart from these, you get tax benefits with them as well, here is how:

What is ULIP? 

  • ULIP is the Unit Linked Insurance Plan which is an investment plus insurance tool where the life assured also gets the life cover as part of his/her investment plan. 
  • One of the unique advantages of ULIP is tax saving benefit which can be opted throughout the policy term and at the time of maturity. 
  • Customers are preferring ULIP plans moreover other investment options available because of their flexibility. 
  • It is considered a consistent option for fulfilling wealth creation goals in the long term. This is because it is a combination of returns, tax savings, and insurance.

7 Things to Know About the ULIP Tax Benefits 

Apart from better returns and short lock-in periods, ULIPs are the popular instruments to save tax. Let’s understand 7 things about the tax benefits of ULIPs: 

  1. Tax Saving Benefit on ULIPs Paid Premium 

    A policyholder can avail of tax deduction up to Rs.1,50,000 on the policy premium amounts paid towards the ULIPs under sections 10D and 80C of the Income Tax Act, 1961. Continue your ULIP policy for 5 years and enjoy the exemption on taxes. 

  2. ULIP Tax Benefits for Maturity 

    ULIP is the market-linked investment plan that offers maturity amount free of taxes as per the prevailing laws such as section 10 (10D) of the income tax act, 1961. To avail tax benefits on maturity, the premium should be less than the 10 percent of the sum assured, if the plans are bought after April 1, 2012.  For people who have purchased plans after April 1, 2012, the maturity amount will be tax-free, if the yearly premium is lower than the 20 percent of the sum assured. In the case of life assured’s death, the death benefit is also free of taxes. 

  3. Tax-free withdrawals in case of death 

    In case of the policyholder’s unfortunate demise, the family is eligible to receive a sum assured amount along with the returns generated by the ULIP plans. The pay-out is relieved under the rules of Income Tax. 

  4. Tax Benefit – Partial Withdrawals 

    Partial Withdrawals are tax-free in the case of ULIPs. In case of withdrawing money from a ULIP plan after the 5 years of the lock-in period, you are not required to pay taxes for those withdrawals. The condition is that the amount of withdrawal will not exceed 20 percent of the fund amount or value. 

  5. Top-up deductions 

    ULIP provides an option to increase their investment by purchasing top-ups. These Top-ups are also entitled to income tax deductions u/s 80C and 10D. 

  6. Long Time Tax Benefits 

    You can enjoy ULIP tax benefits for a long-term investment. The lock-in period is of around five years and you profit for at least 5 consecutive years by saving tax on your premiums. You can gain more tax benefits toward ULIPs if you continue with your policy. 

  7. ULIP offers investment, life cover, and Tax benefits under a single plan 

    Unit-linked insurance plans are quite beneficial over other traditional insurance plans, PPFs, and mutual funds. Life insurance provides life cover but it does not help you in wealth creation. On the other side, mutual funds offer you good returns but no insurance coverage. Whereas, ULIP plans create a bridge and provide you an additional benefit of tax saving.  

Key features and Benefits of ULIPs 

  1. Offers insurance plus investment benefits 

    The main objective of a ULIP plan is to provide maximum wealth appreciation on your investment by market-linked tools and returns. These plans also provide wide life coverage benefits to you and your family throughout the policy term. 

  2. Choose and switch between funds 

    ULIPs provide an option to switch between the equity and debt funds anytime during the policy tenure. A fixed number of switches are allowed within a financial year without paying any extra payment. It is advisable to refer to the policy brochure and documents to know more about whether your ULIP plan offers free switches. 

  3. Partial Withdrawals 

    Initially, all the ULIP plans have a lock-in period of five years. However, a policyholder can select a fixed number of withdrawals from the accrued fund, after the completion of the lock-in period. You are not required to pay any additional charges. 

  4. Redirection of Premiums 

    While investing in ULIPs, you are allowed to redirect your future premiums in between the available fund options at any time. You are required to provide the policy number and mention the type of fund in which you are redirecting your premiums. You may also specify the % of the premium that is allocated for each type of fund.

Wrapping It Up!

ULIPs provide you an opportunity for creating wealth creation goals and to ensure your family’s future and their goals. The plans are flexible where the choice of different fund options are also available and you can switch funds as per your investment objectives or market activities. Get the tax savings and withdrawals free of taxes at the time of maturity or partial withdrawals.

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