8 Things to Know About the Tax Benefits of ULIPs

What are ULIPs?

ULIPs stand for Unit Linked Insurance Plans. They are a type of insurance product that combines life insurance coverage with investment options. ULIPs offer life insurance protection for your family in case of your unfortunate demise, similar to other life insurance plans. At the same time, they allow you to invest a portion of your premium in market-linked instruments like equity or debt funds.

One of the unique advantages is ULIP taxation which provides tax-saving benefits that can be opted for throughout the policy term and at the time of maturity.  It is considered a consistent option for fulfilling long-term wealth creation goals because it combines returns, tax savings, and insurance.

Things to Know About the ULIP Tax Benefits

Besides better returns and short lock-in periods, ULIPs are popular tax-saving instruments. Let us understand 8 things about the ULIP tax benefits: 

• Tax Deduction on Premiums*

  • ULIP tax exemption of up to ₹1.5 lakh: You can claim a tax deduction of up to ₹1.5 lakh per year on the premiums paid towards your ULIP policy under Section 80C of the Income Tax Act, 1961. This deduction is subject to the overall limit of ₹1.5 lakh for investments under Section 80C, which includes other options like PPF and ELSS mutual funds.

• ULIP Tax-Free Maturity Amount: The money you receive on reaching the maturity of your ULIP policy can be tax-free! ULIP tax-free limit benefit is available under Section 10(10D) of the Income Tax Act*. However, there's a condition: This tax exemption applies only if the total premium paid throughout the policy term does not exceed ₹2.5 lakh in any single year. Other conditions:

  • If the plans are bought between April 1, 2012, and February 1, 2021, the premium should be less than 10% of the sum assured to qualify for tax benefits on maturity.  

  • For people who have purchased plans before April 1, 2012, the maturity amount will be tax-free if the yearly premium is lower than 20% of the sum assured. 

  • For plans bought after February 1, 2021, the total premiums paid should be less than ₹2.5 lakh to gain tax exemptions on maturity. 

  

• ULIP Taxation (Tax-Free Death Benefit)*: This is an important feature of life insurance. In case of an unfortunate event, the life cover benefit paid to your nominee is completely tax-free under Section 10(10D) of the Income Tax Act. This ensures your family receives the full amount without any tax deductions, helping them financially during a difficult time.

• ULIP ₹2.5 Lakh Tax Exemption: As mentioned earlier, the tax-free benefit on maturity amount applies only if your annual premium stays within ULIP ₹2.5 lakh tax exemption. If you pay more than ₹2.5 lakh in a year, any gains you earn on that excess amount will be taxable as capital gains when you receive the maturity benefit.

• ULIP Plan Tax Benefits on Partial Withdrawals: Partial Withdrawals are tax-free in the case of ULIPs. In case of withdrawing money from a ULIP plan after 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% of the fund amount or value. 

• Top-up Deductions: ULIP plans provide an option to increase their investment by purchasing top-ups. These Top-ups are also entitled to income tax deductions under Sections 80C and 10D of the Income Tax Act*. 

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

• ULIP Plans Offers Investment, Life Cover, and Tax Benefits under a Single Plan: Unit Linked Insurance Plans (ULIPs) are quite beneficial over other traditional insurance plans, PPFs, and mutual funds. Life insurance provides life cover but does not help you create wealth. On the other hand, mutual funds offer you good returns but no insurance coverage. In comparison, ULIP plans to create a bridge and provide you with the additional benefit of tax saving.

*The information on this website does not constitute tax advice. Tax benefits mentioned are subject to qualifications under Sections 80C, 10(10D), 115BAC, and other relevant provisions of the Income Tax Act, 1961. Goods and Services Tax (GST) and any applicable cess will be charged additionally at prevailing rates. Tax laws are subject to change. Please consult a qualified tax advisor for specific guidance on your situation.

Key Features and Benefits of ULIP Plans

• Insurance Plus Investment Benefits:  ULIPs offer the potential for investment growth through market-linked funds and life insurance coverage to you and your family throughout the policy term. 

• Choose and Switch Between Funds: ULIPs allow switching between 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. 

• Partial Withdrawals: Most of the ULIP plans have a lock-in period of 5 years. However, a policyholder can select a fixed number of withdrawals from the accrued fund after the lock-in period. You are not required to pay any additional charges. 

• Redirection of Premiums: While investing in ULIPs, you can redirect your future premiums between the available fund options. 

In addition to these features, investors can use the SIP calculator to determine the returns and growth of their ULIP investments. The SIP calculator allows individuals to calculate the maturity amount based on their investment amount, tenure, and expected rate of return.

Wrapping It Up!

ULIPs offer a combination of life insurance protection and potential wealth creation with tax benefits. You can leverage Section 80C deductions for premiums and enjoy tax-free maturity payouts under certain conditions. The flexible fund options allow you to adapt your investment strategy to your risk tolerance and market conditions. In short, ULIPs can be a valuable tool for securing your family's future while strategically reducing your tax burden.