What is ULIP? ULIPs are a popular tax-saving investment in India. If you’re thinking, “Why should I invest in ULIP now?” then learning about ULIP tax exemptions may help you comprehend why these investment plans are one of India’s most popular tax-saving solutions.
Let’s examine the Income Tax Act, 1961’s ULIP tax exemptions and benefits.
Tax advantages on premiums paid –
The premium you pay for your ULIPs can be deducted from your total income under section 80C of the Income Tax Act of 1961, up to Rs. 1.5 lakhs. Suppose the policy does not meet Section 10(10D) conditions. In that situation, Section 80C deductions are limited to 10% of the capital sum assured for policies issued after April 1, 2012, and 20% for guidelines offered before April 1.
Tax advantages upon maturity –
If the insured survives the term, the insurer pays the maturity benefits to the policyholder during tenure expiry. According to section 10(10D) of the Income Tax Act of 1961, these benefits are also tax-free. The following conditions must be met to qualify for this tax break:
The annual premium for ULIPs purchased on or after April 1, 2012, should be less than or equal to 10% of the capital sum assured. The annual premium for ULIPs purchased before April 1, 2012, should be less than or equal to 20% of the capital sum assured. The top-up premium should also be considered when calculating the annual premium.
If the policyholder passes away while the plan is in effect, the death benefits received are tax-free in the hands of the nominee. It should be noted that the demise proceeds from the key man policy will be taxable (Employer-employee policy)
Capital gains tax
Because ULIPs must be held for a minimum of five years, any profits earned are long-term capital gains. The Long-Term Capital Gains (LTCG) tax was introduced in the Union Budget of 2018, with increases in equity investments and equity mutual funds exceeding Rs. 1 lakh taxed at 10%.
Other advantages provided by ULIPs –
In addition to the tax advantages described above, Insurers provide several other ULIP tax benefits. ULIPs are an excellent choice for investing in long-term financial goals such as child education/marriage, retirement, etc. Furthermore, this long-term investment product allows investors to switch according to their financial objectives.
In addition, here are a few reasons why ULIPs are one of the ideal tax-saving investment options:
It aids in goal-centric planning – Because ULIPs have a minimum lock-in period of five years, policyholders can implement goal-centric financial planning. Thus, ULIPs can be used to plan for future financial goals such as marriage, child education, home purchase, etc. Only after the lock-in period has ended are partial withdrawals permitted.
Top-up your investments – ULIPs also allow you to invest any excess cash. The top-up facility will enable policyholders to invest additional funds in their policy. And, under section 80C of the Income Tax Act, these top-ups are both deductible and exempt.
Withdrawals are tax-free – The policy also provides for death benefits. Along with significant ULIP tax benefits on withdrawals that may occur in certain circumstances, such as partial withdrawal, policy maturity, or the policyholder’s demise. At maturity, the policyholder receives an assured benefit free of tax under section 10D of the Income Tax Act of 1961.
Tax deduction on premium paid – In the case of ULIPs, the insured person receives a tax exemption on the number of premiums paid under Section 80C of the Income Tax Act of 1961. This means that the premiums you pay for your ULIP are tax-deductible, and the limit is increased to Rs. 1.5 lakh. The funds invested in ULIPs are then invested in other funds such as equity, debt, and money market instruments.
In FY 2020-21, a new tax regime was made available to taxpayers. So, they can choose to opt for either the existing or the new income tax regimes and pay tax accordingly.
Overall, investing in ULIP is a wise decision. As a combination product, ULIPs provide benefits such as tax savings*, life insurance, and assured returns with minimal risk. So, if you are considering a ULIP investment, choose from online instead of offline options, with the ideal life cover and additional investment options such as terminal illness and accidental/death benefits based on your needs.
‘Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.‘
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply
Tax benefit is subject to change in prevalent tax laws