For those looking to invest money and insure themselves under the same plan, the best option is a ULIP or a Unit Linked Insurance Plan. These plans have been gaining traction for the last few years as they have been a boon to individuals who want returns, as well as the sum assured, when they pay for a life insurance policy. One aspect that makes the ULIP even more lucrative is the tax benefits it provides when compared to other investment options. The tax benefits are permitted because ULIPs are considered a life insurance product first and an investment plan secondarily. Let’s learn more about the tax benefits that can be gained with a ULIP in this article.
How does a ULIP work?
Before we move on to the tax benefits related to ULIPs, it is important to understand how ULIPs work and what distinguishes them from other investment or insurance products. The premium that you pay towards a ULIP is directed two ways; a part of it goes towards building your life cover and the other portion is invested into various investment instruments. Depending on the policyholder’s risk-taking capacities, the investments may be either equities, debt-related instruments, or a mixture of both. The policyholder can increase or decrease the money invested into either asset class as per the fund switches made available to them.
ULIPs usually have a lock-in period of five years, after which one can make partial withdrawals from the accumulated funds. The returns on the investment, whether positive or negative, do not have any effect on the life cover amount.
ULIP tax benefits as per prevalent tax laws
Tax deductions on premiums
According to Section 80C of the Income Tax Act, a ULIP policyholder can claim tax deductions of up to Rs. 1.5 lakhs against the premium that they pay towards their plan. The same can be achieved by filing the ITR and mentioning the appropriate details where required.
Tax exemptions on death benefit payout
As a ULIP is a life insurance product, the nominee/s of the policyholder are eligible to receive the death benefit payout in case the life assured passes away. As per Section 10 (10D) of the Income Tax Act, 1961, the proceeds received from the life insurance policy are exempt from tax.
Tax exemptions on maturity benefit
The maturity benefit received by the policyholder when they survive the maturity of the policy is tax-exempt as well as per the aforementioned tax laws.
There are some conditions under which the policyholder can achieve these ULIP tax benefits on maturity, such as:
- If the policy has been purchased before April 1, 2012, the premium paid should be less than 10% of the sum assured.
- If the policy has been brought after April 1, 2012, the premium paid should be less than 20% of the sum assured.
No taxation on partial withdrawals
As mentioned previously, the policyholder can make partial withdrawals once the lock-in period of 5 years is complete. The good news is that these withdrawals too are exempted from tax, given that the withdrawn amount is not more than 20 percent of the fund value.
Though most of these tax benefits can be availed with a term policy as well, the investment options that ULIPs offer and the chances of returns, give ULIPs an edge.
A note to remember:
Tax laws go through regular evaluations and changes, as decided by the finance ministry. As such, the benefits mentioned here are also subject to changes in tax laws.
For instance, Budget 2021 removed the tax-exemptions on the premiums of ULIP policies bought after January 2021 if the annual premium for the ULIP plan exceeded Rs. 2.5 lakhs. If there is more than one policy bought after January 2021, the tax exemption shall be applicable only for those policies whose aggregate premium is not more than Rs. 2.5 lakhs for any of the previous years during those policies’ term.
It is always advisable to reach out to a tax consultant and financial expert before buying a ULIP, a term policy, or any insurance product for tax-saving purposes.