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Know Tax Advantages of ULIPs

Read why ULIPs are one of the most popular investment instruments available in the market today

Saturday October 17, 2020 11:04 AM, ummid.com News Network

ULIP Tax Benefits

A life insurance policy is vital to protect your family's financial future in case of an unfortunate event. Life insurance policies offer a nominal return rate in terms of bonus over and above the maturity amount.

However, Unit-Linked Insurance Plans (ULIPs) are a type of life insurance plan that can provide high returns on investment based on how the fund performs in the market. Traditional life insurance policies and ULIPs serve the same purpose and are beneficial if you stay invested for a long period of ten to fifteen years.

You may want to know what is ULIP. Well, it is a kind of life insurance policy that offers dual benefits of life cover and wealth creation.

A part of your premium gets invested in an equity fund or debt fund, or a combination of both as per your risk-taking appetite. These attributes make ULIP a standout investment alternative, as no other product offers such a package.

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Therefore, ULIPs are one of the most popular investment instruments available in the market today. Apart from these advantages, ULIPs are considered as an incredible tax-saving instrument. Let us understand how.

1. Tax benefit on the amount paid as premium

According to Section 80C of the Income Tax Act, 1961, you can avail of a maximum tax deduction of INR 1.5 lakh. You can get this tax deduction for the premium paid towards the policy, which is in either your name, your child’s name, or spouse’s name.

Moreover, in the case of ULIPs, you have the flexibility of switching from one fund to another during volatile market conditions. This switching of funds is also tax-free.

2. Tax benefits on maturity

One of the best features of a ULIP investment plan is that it offers a tax-free amount on maturity. According to Section 10(10D) of the Income Tax Act 1961, the amount received on maturity is exempted from tax if:

• The policy is purchased after April 1, 2012, the yearly premium paid should be equal to, or less than 10 percent of the sum assured
• The policy is bought before April 1, 2012, the annual premium must be less than, or equivalent to 20 percent of the sum assured

3. Long-term capital gain tax benefit

You can reap the ULIP tax benefits if you stay invested for a long-term perspective. As ULIP has a mandatory lock-in period of five years, you can seek deductions under Section 80C of the Income Tax Act 1961 on the premiums paid towards the policy for at least this duration. As per the Union Budget of 2018, ULIP is the only market-linked investment instrument that provides a tax exemption from long-term capital gains.

4. Tax benefit on top-ups

With this investment avenue, you can get ULIP tax benefits on top-up payments. By investing in ULIP, you can expand the scope of your policy by purchasing top-ups periodically. Such top-ups enable you to increase your investment and provide a tax deduction under Section 80C and 10(10D) of the Income Tax Act, 1961.

Besides this, in case of any untoward incident, the death benefit that your nominee will receive will be tax-free.

Due to the combined advantages of life insurance, investments in diverse funds, and tax-savings, a ULIP investment plan is considered a better option compared to traditional insurance plans and other investment instruments like mutual funds and Public Provident Fund. Conventional life insurance policies provide the necessary life coverage, but they do not help you in maximizing your investment returns. With ULIPs, you can grow your wealth as well as insure your life.

The opportunity of choosing the funds, changing the premium amount, selecting the riders (add-ons), and tax exemptions make ULIP a must-have in your financial portfolio. So, before investing in a ULIP, it is advisable to ascertain your risk-bearing capacity and invest in a suitable fund to meet your financial objectives.


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