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How to Save tax with ULIPs?

Know more about ULIP tax benefits to maximize tax savings.

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A Unit-Linked Insurance Plan is the right choice of investment for several reasons. People who are looking to secure life coverage and grow their money over time can opt for ULIPs to serve their needs efficiently. Apart from that, it can be an excellent addition to your investment profile due to the ULIP tax benefit. Let's understand more about ULIP taxation and other features. 

Overview of ULIPs

A Unit-linked Insurance Plan is unique as it offers dual benefits to the policyholder. The premiums that are payable for a ULIP are divided for insurance and investment purposes. The policyholder can decide on the type of investment he wishes to make with it.

A defined portion of the premium goes into securing life coverage for the insured individual. The remaining portion of the premium is used to invest in various debts and equity funds basis customer’s choice. Like all other life insurance policies, ULIP tax benefits are available for the policyholder to reduce their financial burden.

Most people consider ULIP a good investment option as it can bring higher returns to the policyholder. It can help meet significant life goals such as higher education of a child or retirement planning. The additional ULIP tax benefits help in managing tax liability.

It is essential to note that ULIP does not come without risks. Since a ULIP is a market-linked investment product, the performance of the market affects the fund performance. It is upto the investor to determine their risk appetite and then go forward with the purchase. Depending on the types of funds available for investment under the ULIP, the risk-factor may vary.

ULIP Tax Benefits

Any investment in life requires careful thinking as it involves your hard-earned money. Most people plan their finances to manage regular life expenses better and meet future needs. When purchasing a ULIP, it is advisable to appropriately calculate the adequate life cover to fulfil personal objectives.

While ULIP investment is valuable, it can have an impact on your income. There are certain ULIP tax benefits made available by the Government of India for the policyholders. When you invest your money towards a suitable plan, it is eligible for a ULIP tax deduction.

This follows from the provision that 'any sum paid to keep in force' a life insurance policy can be claimed as a deduction. The ULIP tax benefit can also include the extra components like service tax, etc., paid to the insurer. 

Let's discuss some critical points about ULIP taxation in detail to understand better.

  • The two key provisions of the Indian Income Tax Act that are applicable for ULIP tax benefit are the section 80C (life insurance premium is tax-deductible) and section 80CCC (amount paid towards pension plans is tax-exempt).
  • According to these provisions, a ULIP tax benefit of up to Rs. 1,50,000 is allowed as per section 80C and section 80CCC in a financial year. It means that while you can certainly invest a higher amount, the total ULIP tax exemption is capped at Rs. 1,50,000* per annum.
  • You should keep in mind that the yearly premium should be less than 10% of the sum assured. Hence, if the chosen sum assured is Rs. 15 lacs and the annual premium is less than Rs. 1.5 lacs, the entire amount can be used to avail ULIP tax benefit.

  • The two key provisions of the Indian Income Tax Act that are applicable for ULIP tax benefit are the section 80C (life insurance premium is tax-deductible) and section 80CCC (amount paid towards pension plans is tax-exempt).
  • According to these provisions, a ULIP tax benefit of up to Rs. 1,50,000 is allowed as per section 80C and section 80CCC in a financial year. It means that while you can certainly invest a higher amount, the total ULIP tax exemption is capped at Rs. 1,50,000* per annum.
  • You should keep in mind that the yearly premium should be less than 10% of the sum assured. Hence, if the chosen sum assured is Rs. 15 lacs and the annual premium is less than Rs. 1.5 lacs, the entire amount can be used to avail ULIP tax benefit.
  • However, if the annual premium is higher, say Rs. 3 lacs for the same sum assured of Rs. 15 lacs, the available ULIP tax benefit is still Rs. 1.5 lacs - i.e. (10% of Rs. 15 lacs).
  • The plan must remain active for at least five years to claim the ULIP tax benefit. If you stop paying premiums for the plan during the fifth year, ULIP tax benefits availed in the first four years will be withdrawn. 
  • Hence, ensure that you have a long-term investment horizon and continue to pay the premiums for the entire paying term to benefit from ULIP taxation. 

Notably, the taxability of ULIP is subject to change in tax laws by the authorities. The ULIP tax benefit is subject to the prevailing regulations at the time of paying premiums.

  • However, if the annual premium is higher, say Rs. 3 lacs for the same sum assured of Rs. 15 lacs, the available ULIP tax benefit is still Rs. 1.5 lacs - i.e. (10% of Rs. 15 lacs).
  • The plan must remain active for at least five years to claim the ULIP tax benefit. If you stop paying premiums for the plan during the fifth year, ULIP tax benefits availed in the first four years will be withdrawn.
  • Hence, ensure that you have a long-term investment horizon and continue to pay the premiums for the entire paying term to benefit from ULIP taxation.

Notably, the taxability of ULIP is subject to change in tax laws by the authorities. The ULIP tax benefit is subject to the prevailing regulations at the time of paying premiums.

Fund Options under ULIPs 

Following are some of the most common investment options available under ULIP plans:

1. Equity Funds 

These are the ULIPs that are typically associated with high-risk. Under this ULIP, you invest in high-risk equities and stocks of companies. With the greater risk, it is also known for bringing the highest returns.

2. Income, Fixed-Interest, And Bond Funds 

These ULIPs are for investors who are comfortable with medium-risk investment opportunities. You can invest your money in government securities, fixed-income securities, corporate bonds, and other options.

3. Cash Funds 

This ULIP allows the investors to put their money in the lower risk market instruments such as market money funds, cash, bank deposits, and others. The lower risk profile yields lower returns for the investor.

4. Balanced Funds 

As the name suggests, under this ULIP, you can maintain a balanced investment portfolio. They are comparatively stable as the money is invested in proportions in different types of funds. You can divide the amount of money to be invested among high-risk equities, company stocks, and fixed-interest instruments, which present a lower risk.

Selection of a specific type of ULIP also varies depending on your investment objective, such as funding your child's education, wealth-creation, or planning for retirement. Furthermore, there are life-stage based/non-life stage based ULIPs, Guarantee/Non-Guarantee ULIPs, Single Premium/ Regular Premium ULIPs to grow your money, per your convenience.  

Benefits of ULIP Investments 

You can use a ULIP to meet various financial obligations in life in several ways. The variety of investment options make it a desirable option. As an investor, it is in your best interest to review the taxability of ULIP, among other benefits. Here are some of them, discussed in detail to help you make an informed decision:

1. Financial Independence 

If you invest in a ULIP for retirement planning, it can give you financial support in the golden years of life. It is crucial to secure a fund for the future when you do not have a stable income source. Besides, ULIP tax benefits make it a sound investment choice for your present financial situation. 

2. Life Cover 

The life coverage provided by ULIPs can keep your loved ones safe in times of crisis. You can rest assured with a ULIP that your family will remain protected even in your absence. They will not have to compromise on their dreams in life because a ULIP not only secures the insured's life but also grows the money over time. 

1. Financial Independence 

If you invest in a ULIP for retirement planning, it can give you financial support in the golden years of life. It is crucial to secure a fund for the future when you do not have a stable income source. Besides, ULIP tax benefits make it a sound investment choice for your present financial situation. 

2. Life Cover 

The life coverage provided by ULIPs can keep your loved ones safe in times of crisis. You can rest assured with a ULIP that your family will remain protected even in your absence. They will not have to compromise on their dreams in life because a ULIP not only secures the insured's life but also grows the money over time. 

3. Investment Flexibility 

ULIPs are flexible investment tools as they allow the policyholder to choose funds for investment purposes. You can switch between funds within the policy term (as per policy terms and conditions). Some ULIPs also offer the facility of partial withdrawal of the money.

4. Tax Benefits 

Unit Linked Insurance Plan taxability enables investors to reduce the burden on their income. Your regular living expenses will not have to suffer because of an investment choice. Therefore, when you are purchasing the plan, make sure you know the ULIP taxation rules. As per prevailing tax laws subject to change 

Frequently Asked Questions (FAQs)

Q. What Is Net Asset Value? 

A. NAV is the value of each unit of the fund on a particular day. The NAV of each fund is displayed on the company website for reference.

Q. What can I do if I am not Satisfied with a ULIP after Purchase?

A. It is possible to seek a refund of premiums within the free look period (15 days after the policy document's receipt) in case you disagree with the terms and conditions of the policy. You shall be refunded the fund value, including charges levied through the cancellation of units subject to deduction of expenses towards the medical examination, stamp duty, and proportionate risk premium for the period of cover.

Q. What are the Different Charges for ULIP? 

A. The charges may differ with different ULIPs. However, some commonly applicable charges are:

  • Premium Allocation Charges
  • Mortality Charges
  • Fund Management Fees
  • Policy/Administration Charges
  • Surrender Charges
  • Fund Switching Charges
  • Service Tax Deductions

Q. What is the Benefits Payable to the Nominee in Case the Insured Passes Away? 

A. The nominee is entitled to receive the sum assured and/or value of the fund units in the event of a risk to the life insured during policy term. 

 

Sources:

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo261&flag=1 (2007)

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo758 (2010)

ARN No.: Sept21/Bg/01

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3:54 Min Read Time

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