Simply put, tax planning is the arrangement of your finances to reduce your tax liability. A carefully planned strategy will entitle you to claim deductions, exemptions, rebates, and relief under various IT Acts and provisions, thereby allowing you to enjoy your income without losing too much to taxes.
ULIP plans offered by life insurance companies are such financial instruments that offer tax savings as well as multiple other benefits. In fact, based on the tax bracket you fall into, ULIPs can help you save up to Rs. 45,000* in taxes each year! Let us learn more:
Unit Linked Insurance Plan offers life insurance with investment. A part of the premium is utilised for insurance cover to the policyholder, while the remaining amount is invested in various equity and debt schemes. Moreover, with ULIPs, you can select the type of fund (with varying degrees of risk-return potential) where you want your premium to be invested. In effect, ULIPs are akin to mutual funds, with the additional benefit of life cover.
As with all life insurance plans, the amount invested in a ULIP is available for tax deductions. This follows from the income tax provision that 'any sum paid to keep in force' a life insurance policy can be claimed as a deduction. Hence, you can even include the extra components like service tax, etc., that have been paid to the insurer. The two key provisions of the Indian IT Act that are applicable here are the section 80C (life insurance premium is exempt from tax) and section 80CCC (amount paid towards pension plans is tax exempt).
According to these provisions, an exemption of up to Rs. 1,50,000* is allowed under section 80C and section 80CCC in a financial year. This means that while you can certainly invest a higher amount, the total available deduction is capped at Rs. 1,50,000* per annum.
The important condition to keep in mind is that the yearly premium should be less than 10% of the sum assured offered by the ULIP. Hence, if the sum assured is Rs. 15 lacs and the yearly premium is less than Rs. 1.5 lacs, the entire amount is available for deduction. However, if the premium is higher, say Rs. 3 lacs for the same sum assured of Rs. 15 lacs, the available deduction is still Rs. 1.5 lacs - i.e. (10% of Rs. 15 lacs).
In addition, to claim the deductions, the ULIP must remain active for at least two years. Also, if you stop the ULIP during the second year, the benefits availed in the first year are also withdrawn. So ensure that you have a long-term investment horizon and continue to pay the premiums for the entire paying term.
Click here to know more about ULIPs offered by Max Life. Invest in them not only because it helps you save tax, but also because they offer capital appreciation and financial protection.
* Tax benefits are subject to the changes in tax laws. All the tax benefits are subject to the tax laws prevailing at the time of payment of premiums.