Why are ULIPs one of the best tax saving instruments?
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Why are ULIPs one of the best tax saving instruments?

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  • 15th Mar 2021
  • 910
Why are ULIPs one of the best tax saving instruments?

A Unit-Linked Insurance Plan, more commonly known as a ULIP, is a life insurance product. Compared to traditional life insurance tools, such as term insurance plans that offer only life insurance protection, or high-risk investment avenues like mutual funds that provide only the opportunity to create wealth, a ULIP is a market-linked plan that offers the opportunity for wealth creation along with insurance and superior tax-benefits.

Here are 5 tax benefits of ULIPs that you should know:

1. The premiums paid towards a ULIP are eligible for tax deductions

The premium paid towards a ULIP qualifies for a tax deduction of up to ₹ 1,50,000 under Section 80C of the Income Tax Act, 1961. However, this deduction is applicable only if the premium is less than 10% of the sum assured of the plan. For premiums beyond 10%, the deduction amount is still capped to 10%. So for instance, if the premium paid by you under a policy is ₹ 3,00,000 for a sum assured of ₹ 15,00,000, the deduction amount will be limited to ₹ 1,50,000.

2. A ULIP offers tax benefits on maturity.

Maturity refers to the completion of your policy. Under a ULIP, you get the sum assured or the entire value of the unit-linked investments (whichever is higher) at the time of maturity. This payout is exempted from tax under Section 10(10) D of the Income Tax Act, 1961. Here too, the premium amount must be limited to 10% of the sum assured value.

3. You can make tax-free partial withdrawals under a ULIP.

You can make tax-free partial withdrawals after completing the mandatory lock-in period of 5 years of your ULIP. However, the withdrawal amount cannot exceed 20% of the total sum assured value. This not only helps in avoiding tax but also allows you to make partial withdrawals for different financial needs, such as marriage, a child’s education, retirement, home purchase, etc. Hence, you have the freedom to withdraw funds from time to time.

4. The death benefit payable under a ULIP is exempt from tax.

The death benefit of a ULIP that is payable to your nominees/ family members is not taxable. This benefit includes the total sum assured and the returns generated through market-linked investments under the plan.

5. Any top-ups made under an existing ULIP plan are eligible for tax deductions./p>

With a ULIP, you can make top-up investments or cash additions after the 5-year lock-in period. These top-ups are eligible for tax deductions under Section 80C and Section 10(10) D of the Income Tax Act, 1961. However, the premium amount must not exceed 10% of the sum assured.

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If you are looking for life protection, high returns, and the flexibility to choose investment strategies,you can invest in Wealth Optima ULIP

Kotak Wealth Optima Plan offers benefits, such as:

  • Whole life coverage until the age of 99
  • Choice of two investment strategies:
  • Self-managed strategy

    Age-based strategy

  • Option to make yearly additions from the end of the 6th policy year
  • Option to add wealth boosters from the end of the 10th policy year
  • Two additional protection riders:
  • Kotak accidental death benefit

    Kotak permanent disability benefit

  • Tax benefits under the relevant sections of the Income Tax Act, 1961.

To sum it up

A ULIP is a perfect bridge between high-risk assets like mutual funds and simple life insurance protection products like pure term plans. It gives you high returns, life coverage, and ample tax benefits.

- A Consumer Education Initiative series by Kotak Life

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