ULIP Tax Benefits: 9 Things to Know About the ULIP Tax Benefits

ULIPs offer combined life insurance coverage with investment opportunities, providing policyholders with a holistic financial solution for wealth creation and protection.

6,456 Views | Updated on: Jul 22, 2024

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Unit Linked Insurance Plans (ULIPs) represent a unique fusion of insurance and investment. They offer individuals a comprehensive financial solution tailored to their long-term goals. There are ULIP tax benefits that make them an attractive investment option.

With tax benefits in ULIP, the potential for high returns, and flexible investment options, these plans have emerged as a preferred choice for investors seeking to optimize their financial portfolios.

What is ULIP?

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 plan is a market-linked plan that offers the opportunity for wealth creation along with insurance and superior tax-benefits.

Moreover, ULIP is a life insurance product that can be considered more reliable. It is one of the best wealth-creation tools for long-term investment, given the ULIP tax benefits, protection and security, and the returns all in one insurance product.

Why are ULIPs One of the Best Tax Saving Instruments

How do Tax Benefits in ULIPs Work?

ULIP tax benefits are designed to provide incentives for individuals to invest in these hybrid financial products, which offer both insurance coverage and investment opportunities. Let us see how ULIP tax benefits work:

Tax Deduction on Premiums

There are certain income tax benefits on ULIPs that offer huge relief for taxpayers. Premiums paid towards ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. Under this section, ULIP tax benefits allow individuals to claim deductions from their taxable income for certain investments and expenses, including ULIP premiums. The maximum deduction allowed under Section 80C is ₹1.5 lakh per financial year.

Tax-Free Proceeds

Upon maturity of the ULIP policy, the proceeds received by the policyholder are typically tax-free under Section 10(10D) of the Income Tax Act, 1961. This section provides an exemption from tax on the amount received upon maturity, subject to certain conditions. To qualify for ULIP plan tax benefits under Section 10(10D):

The ULIP policy must be in force for a minimum specified period, usually five years.
The sum assured (minimum guaranteed amount) must be at least ten times the annual premium paid for policies issued on or after April 1, 2012.
For policies issued before April 1, 2012, the sum assured must be at least five times the annual premium paid.

Tax-free Death Benefit

In the unfortunate event of the policyholder’s demise during the policy term, ULIPs provide a death benefit to the nominee/beneficiary. The death benefit typically includes the higher of the sum assured or the fund value and is usually tax-free under Section 10(10D) of the Income Tax Act, 1961, subject to the same conditions as mentioned for maturity proceeds.

9 Things to Know About the ULIP Tax Benefits

Understanding the ULIP tax benefits is crucial for investors seeking to optimize their financial planning while simultaneously securing insurance coverage. With its unique combination of investment opportunities and insurance protection, ULIPs offer a range of tax advantages under Indian tax laws. Let us see what ULIP tax benefits you can avail yourself:

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 at 10%.

So, for instance, if the premium you pay 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. Additionally, you must note that, as there is a lock-in period of 5 years on ULIP policies, you will be directly saving taxes through ULIP tax exemption benefits.

ULIP Offers Tax Benefits on Maturity

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

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 helps avoid tax and 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.

The Death Benefit Payable Under a ULIP is Exempt from Tax

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

Any Top-ups Made Under an Existing ULIP Plan Are Eligible for Tax Deductions

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.

Long-term Tax Benefits

Long-term tax benefits are among the compelling reasons why ULIPs continue to attract investors seeking to optimize their financial portfolios. ULIPs offer investors the opportunity for long-term wealth creation through market-linked investments while enjoying tax benefits at various stages of the policy lifecycle.

ULIP Offers Investment, Life Cover and Other Tax Benefits Under a Single Plan

Compared to mutual funds, PPFs, and other standard insurance plans, unit-linked insurance plans provide several advantages. Although it provides life insurance, it does not assist in wealth creation. Mutual funds, on the other hand, give you good returns but no insurance. ULIP plans, however, provide a bridge and an additional benefit of tax savings.

Tax Benefits on Switching Between Funds

ULIPs offer the option to switch between different funds based on market conditions or the policyholder’s investment goals. The switching between funds in ULIPs is tax-free and does not attract any tax liability.

Tax Benefits for NRI Investors

Non-Resident Indians (NRIs) can also avail of the ULIP tax benefits. The premium paid by NRIs towards ULIPs is eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The maturity proceeds of ULIPs are also tax-free for NRIs.

Key Features and Benefits of ULIPs

From the flexibility to choose investment options to tax advantages and the provision of insurance coverage, ULIPs offer a comprehensive solution for individuals striving to secure their financial future. Let us explore the features and ULIP tax benefits:

Offers Insurance Plus Investment Benefits

ULIPs provide the dual benefit of insurance coverage and investment growth in a single integrated plan, allowing policyholders to protect their loved ones while simultaneously building wealth over time.

Allows to Choose and Switch Between Funds

These plans offer flexibility by allowing policyholders to select from a range of funds based on their risk appetite and financial goals. Additionally, they can switch between funds to align with changing market conditions or personal preferences.

Partial Withdrawals

ULIPs offer the option for partial withdrawals, enabling policyholders to access a portion of their invested funds in times of financial need without surrendering the entire policy.

Redirection of Premiums

Policyholders have the flexibility to redirect their future premiums towards different fund options within the ULIP, allowing for adjustments in investment strategy as per changing financial objectives or market dynamics.

Tax Benefits

ULIP tax benefits can be availed under Section 80C of the Income Tax Act for premiums paid, and proceeds upon maturity or death are typically tax-free under Section 10(10D), subject to certain conditions.

Maturity Benefits

Upon maturity of the ULIP policy, the policyholder is entitled to receive the fund value, which comprises the accumulated investment returns over the policy term, providing a lump sum payout to fulfil financial goals or needs.

Death Benefit

In the unfortunate event of the policyholder’s demise during the policy term, ULIPs provide a death benefit to the nominee, which typically includes the higher sum assured or the fund value, ensuring financial protection for the family.

Key Takeaways

With ULIPs, investors have the flexibility to choose from a diverse range of funds based on their risk appetite and financial goals.
The ability to switch between funds enables them to adapt their investment strategy to changing market conditions or personal preferences seamlessly.
ULIPs provide the option for policyholders to make partial withdrawals from their accumulated funds, offering liquidity during financial emergencies.
ULIP tax benefits come under Section 80C of the Income Tax Act for premiums paid towards the plan.
Upon maturity, ULIP policyholders receive the accumulated fund value, providing a lump sum payout to fulfill financial objectives.

Conclusion

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 the ULIP tax benefit. Moreover, ULIP is a highly flexible modern insurance plan where you control your investment and funds. You are free to invest in the market as per your risk appetite and, at the same time, have insurance security. Additionally, the ULIPs tax benefits are something that, as an investor, you cannot ignore.

However, you must ensure that you have analyzed your long-term financial goals and invested accordingly into ULIP. Also, you must understand that the longer you stay invested in ULIP, the higher returns you get. So if you are planning to save for a house, say 15 years from now, you must start investing in ULIP now.

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FAQs on ULIP Tax Benefits

Does ULIP have tax benefits?

Yes, you can get ULIP tax benefits under Section 80C of the Income Tax Act, allowing for deductions up to a certain limit on premiums paid.

What are the tax benefits of ULIP under 10D?

ULIPs also provide tax-free proceeds under Section 10(10D) upon maturity, subject to certain conditions like a minimum premium threshold.

What is a ULIP, and how does it help in tax saving?

A ULIP allows investors to invest in various fund options while also providing life insurance coverage. ULIPs help in tax-saving as the premiums paid towards the policy are eligible for tax deductions under Section 80C of the Income Tax Act, up to a limit of ₹1.5 lakh per year.

Are ULIP tax benefits applicable for taxpayers under both tax regimes?

Yes, ULIP tax benefits are applicable for taxpayers under both the old and new tax regimes, offering flexibility in tax planning.

How do ULIPs compare to other tax-saving instruments like PPF, NSC, and ELSS?

ULIPs have an advantage over other tax-saving instruments like PPF (Public Provident Fund), NSC (National Savings Certificate), and ELSS (Equity-Linked Savings Scheme) as they offer both life insurance coverage and investment opportunities. Additionally, ULIPs have the potential to generate higher returns than other instruments over the long term, depending on the market conditions and the fund option chosen by the investor.

Are ULIPs a risky investment?

Like any investment, ULIPs carry a certain amount of risk. However, ULIPs offer investors the flexibility to switch between different fund options depending on their risk appetite and market conditions. Also, ULIPs typically have a lock-in period of 5 years, which helps in achieving long-term financial goals.

How do ULIPs provide tax benefits?

ULIPs provide tax benefits in two ways: (i) the premiums paid towards the policy are eligible for tax deductions under Section 80C of the Income Tax Act, and (ii) the maturity proceeds or death benefits received from the policy are tax-free under Section 10(10D) of the Income Tax Act, subject to certain conditions.

Can I withdraw my investment in ULIPs before the maturity period?

Yes, ULIPs offer partial withdrawal options after the completion of the lock-in period of 5 years. However, premature withdrawal before the completion of the lock-in period attracts penalties and may result in the loss of benefits.

Is ULIP tax-free after 5 years?

The proceeds from ULIP tax benefits are tax-free after the completion of five years of continuous investment, provided certain conditions are met.

Is ULIP interest tax-free?

ULIPs do not provide interest like traditional fixed deposits; instead, they offer returns based on market performance. However, ULIP proceeds are tax-free subject to conditions.

Is ULIP single premium tax-free?

Yes, single premium ULIPs enjoy tax benefits similar to regular premium ULIPs, including tax-free proceeds under Section 10(10D) upon maturity.

Is ULIP better than FD?

ULIPs offer the potential for higher returns over the long term compared to fixed deposits, but they also carry market risk. The choice depends on individual risk appetite and financial goals.

What are the different charges for ULIP?

ULIPs typically involve various charges such as premium allocation charges, policy administration charges, fund management charges, mortality charges, etc., which may vary across insurers and plans.

What are the fund options available under the ULIP plan?

ULIPs offer a range of fund options including equity, debt, and balanced funds, allowing investors to choose based on their risk appetite and investment goals.

Can you claim Section 80D deductions with a ULIP?

No, Section 80D is specifically for health insurance premiums, while ULIPs fall under Section 80C for deductions on premiums paid.

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