A ULIP plan can help in saving tax efficiently. Want to know how?

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The policyholder bears the risk of the investment portfolio in the ULIP profile. ULIP plan is ideal for goal-oriented long-term savings and wealth creation. It allows the dual benefit of both insurance coverage and investment. Moreover, ULIPs act as a tax-saving tool too as per the IT Act. 

What are the ULIP tax benefits?

ULIPs offer 3-ways tax benefits. Let us understand them one by one.

  1. As per the government norms, you are levied certain taxes on ULIP income earned. However, the premiums payable towards life insurance products, such as ULIPs, are eligible for income tax deduction under Section 80C of the IT Act, up to INR 1.5 lakh each financial year.
  2. For ULIPs purchased after 1-Feb-2021, the maturity benefit is tax-free u/s 10(10D) upto an annualised premium of Rs 2.5 lakhs provided the sum assured is a minimum of 10 times the premium.
  3. The switch between funds is tax-free without any capital gain implication.
  4. The death benefit is completely tax-free in the hands of the nominee, without any limit.

Things to understand about ULIP tax benefits 

ULIP is a concrete financial instrument that allows for the dual benefits of money growth and life coverage. Along with that, you will receive tax benefits. ULIPs allow long-term wealth creation and growth. Some of the details of ULIP tax advantages include the following:

  1. Tax benefits of ULIPs premiums:
    According to government tax norms, you can claim a tax deduction of up to INR 1.5 lakhs per year on the premium amount payable, as per the terms of the chosen plan, as per the Income Tax Act of 1961, subject to a lock-in of 5 years.

  2. ULIP tax benefits on the maturity amount:
    ULIP maturity benefits qualify for tax exemption under Section 10 (10D) of the IT Act, as per the chosen plan’s mentioned conditions.

  3. No Capital Gain implication:
    Unlike other investment products in the market, there is no implication of short or long term capital gains on switching funds from equity to debt or vice versa in ULIPs, making this as the most sought-after tax benefit of ULIPs.

  4. Tax-free death benefit payout:
    During any unfortunate event during the policy term, the designated life coverage amount gets paid to the nominee. The death benefit qualifies for tax exemption under Section 10(10D) of the IT Act. This ensures that the family members receive insurance coverage without losing anything due to tax cuts. 

However, you must remember that these tax norms are subject to change according to government regulations. You must clarify the current circumstances before proceeding with investment in this field. 

 

Other Benefits of ULIPs:

ULIPs have several tax benefits, but that should not be the only reason to invest in one. There are some other significant benefits of ULIPs as well, such as:

  1. Investment cum insurance coverage:
    One of the most highlighting benefits of ULIP investments is that it allows double the benefits of both investment and insurance protection coverage. Here, your premiums get automatically invested towards your chosen financial instruments, allowing you to enjoy market-linked returns that depend on market conditions and performance. You can utilise this amount towards fulfilling certain specific long-term goals like children’s education, buying a house, renovation, business expansion, marriage, etc. 

 

  1. Flexibility:
    ULIPs are very flexible investment instruments that allow you to switch between several funds depending on your tenure, target, risk appetite, and fund performance. Based on your financial status and target, you can diversify your investments among several funds, including equities, debt funds, and hybrid funds. Moreover, you can easily switch between several funds several times during a financial year without any extra cost.

 

  1. Partial withdrawals:
    Unlike several other funds, ULIP plans have been carefully crafted to allow partial withdrawals. You do not need to surrender your entire ULIP investment fund in case you face a financial emergency and require money to handle the situation. This ensures financial security in all circumstances, whether you invest or withdraw.

 

  1. Premium redirection:
    The ULIP plan offers the unique benefit of premium redirection. You can easily allocate your future premium amount to be invested to your chosen fund which may differ from the already existing fund. You can make necessary additions and alterations to your existing financial portfolio depending on the market and fund performances, your risk appetite, financial targets and tenure.  With these changes, you enhance the possibility of risk mitigation and allow yourself to enjoy the full potential of existing growth benefits. 

 

Conclusion

ULIP plans are carefully designed to allow wealth building in the long run, as per the current market performance, along with insurance protection coverage. ULIP tax benefits make them all the more unique and attractive investment avenues. You can customise your ULIP investment portfolio based on your risk appetite, current financial status, and future financial targets.