A unit-linked insurance plan, or ULIP, is one of the many financial products available in the investment market. ULIP investments are one of the most popular investment options because it offers the twin benefits of life insurance and long-term wealth creation. To help investors save more than they invest and get back a percentage of the premiums paid, the government offers many ULIP tax benefits through ULIP insurance plans under the applicable provisions of the Income Tax* Act, 1961.

 

Both salaried and non-salaried individuals, Hindu undivided families (HUFs), associations, companies, trusts, and other bodies that qualify as a person under the Companies Act and the Income Tax* Act can claim these ULIP tax exemptions. Let’s deep dive into the ULIP plans tax benefits you can avail of with a ULIP plan. 

 

How Much Tax* Can You Save With ULIP Insurance?

 

 

ULIPs are primarily meant for generating income for the long term through compounding and saving. They are also meant to give life insurance coverage to the family members of the investor. The ULIP taxation benefits are the third or tertiary aspect of a ULIP plan. However, through sections 80C, 10(10D), and other provisions, you can claim a ULIP tax exemption.

 

• ULIP tax benefit under section 80C of the Income Tax* Act
  
  Section 80C is one of the most popular tax*-saving provisions of the Income Tax Act. ULIP tax-savers are possible through this section. According to Section 80C, you can claim a specific percentage of the premiums paid by you towards a ULIP insurance plan. The amount you can claim as a deduction is up to ₹1,50,000 per annum (in a financial year).
  
  It does not matter how much you invest or how many returns you accumulate through the ULIP plan, the tax-saving ULIP benefit is capped to ₹1,50,000. Moreover, to avail of this ULIP tax benefit, the premiums paid by you should not exceed 10% of the total sum assured received under the ULIP plan.
  
  This benefit is irrespective of the amount you receive as returns. There is another requirement you must meet to receive this tax benefit on ULIP. You must ensure you don’t terminate the ULIP plan before the mandatory lock-in period of five years.
  
  If, for any reason, you end your ULIP insurance plan in the fourth year or a few months before the fifth year ends, you will forgo all the ULIP tax benefits.

 

• ULIP tax exemption under section 10(10D) of the Income Tax* Act
  
  Under section 10(10) of the Income Tax* Act, the maturity payout you receive at the end of a ULIP plan is exempt from tax* deductions. Maturity benefits also include any bonus² received under the ULIP insurance plan.
  
  Even the death benefit your family members receive in the eventuality of your unforeseen demise is exempt from tax* deductions under this section. However, there are some sub-provisos to this section due to the changes in the tax* rules regarding ULIPs in the union budget of 2021. This entails:

 

• ULIP tax exemption on partial withdrawals and top-up additions
  
  ULIP plans allow partial income withdrawals after the mandatory lock-in period of five years is over. The money you withdraw is also tax*-free in the case of partial withdrawals. However, the amount you remove should not exceed 20% of the total sum assured or fund value accumulated under the ULIP plan. Even when you make top-up additions to your ULIP insurance plan, you can claim the ULIP tax benefits and Income Tax* deductions u/s 80C and 10(10D) of the Act.

 

What are the Benefits of a ULIP Plan Apart From the ULIP Tax Benefits?

 

Here are some of the other ULIP benefits:

 

• Inflation-adjusted returns
  
  One of the core benefits of ULIPs is the inflation-adjusted returns they provide. Because ULIPs are market-linked and provide investors with the space to invest in equity, debt, and hybrid funds, the chances of them yielding more returns.
  
  ULIPs rely on the principle of compounding, so over the years, the invested funds compound and increase. Unlike other investment/ insurance plans, ULIPs offer a monetary advantage to their investors. However, they do carry varying degrees of market risks. 

 

• Life insurance protection
  
  ULIPs are popular because they don't just take care of the wealth-creating goals of the investor but also their wealth-preserving ones. The life insurance coverage ULIPs provide is in the form of a death benefit that the investor’s family receives on their demise.
  
  With the death benefit, the family can continue to lead their lives and fulfil their goals of higher education, marriage, retirement, travel, and the like. They will also have enough for emergencies and unforeseeable expenses. 

 

• Flexibility and transparency
  
  ULIPs are flexible and transparent. The investor has a fair degree of control over making investment decisions like choosing what funds to invest in, switching between funds, and deciding how they want to pay their premiums. Moreover, before an investor buys a ULIP plan, they are shown every charge they have to pay to run the ULIP plan.
  
  ULIPs carry various charges because they offer multiple benefits in one product. These include mortality charges, fund management charges, premium allocation charges, and more. In a ULIP insurance plan from Tata AIA Life insurance, the insurance agent also explains these charges and the workings of a ULIP plan in detail.

 

To Conclude

 

As mentioned above, ULIPs are the perfect investment tool for making goal-oriented savings, creating a financial reserve for the long run, and securing your family with life insurance along the way. The tax*-saving aspect of ULIPs is an added benefit of buying a ULIP plan and should not be the only reason you purchase it.

 

L&C/Advt/2022/Jul/1729