Why are ULIPs one of the best tax saving instruments?

• 15th Mar 2021
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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.

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