A unit-linked insurance plan (ULIP) comprises of two components – a life cover that offers a death benefit and an investment component that invests in equity and debt funds. A versatile form of life insurance, ULIP offers financial security along with building your investment corpus.
A ULIP investment plan offers tax-saving benefits on both the premium paid and the return on maturity, subject to conditions. If your long-term goal is to financially secure your family while also building wealth, then you should definitely prefer a ULIP investment plan. Understand the ULIP tax benefits in detail before investing in one.
- Tax Benefit on Paid Premium
Under Section 80C of the Income Tax Act 1961, a maximum deduction of INR 1, 50,000 is applicable on ULIPs. However, this is applicable when specified conditions under Section 10(10D) are met. Otherwise, the amount of deduction is capped at 10% capital sum assured for ULIPs issued on or after 1st April 2012 and 20% capital sum assured for ULIPs issued before 1st April 2012.
- Death Benefit is Exempt from Tax
The death benefit paid out on an active ULIP policy due to the policyholder’s demise is completely tax-free.
- Tax Benefit for Maturity
ULIPs have a market-linked investment component and hence, these plans get tax deductions under Section 10 (10D) of the Income Tax Act, of 1961.
For ULIP investment plans issued before 1st Feb 2021, the returns on maturity are tax-free. This is applicable if the annual premium is less than 10% of the total sum assured for the plans issued after 1st April 2012 and 20% if it was issued before 1st April 2012.
For ULIP investment plans issued after 1st Feb 2021, the death benefit continues to be exempt from tax. However, if the aggregated annual premium on ULIP policies exceeds INR 2.5 lakh in a given financial year, then the returns will be taxable as long-term capital gains. Additionally, 10% taxes are applied to long-term capital gains that are calculated on proceeds of ULIP issued on or after February 1, 2021 and exceed INR 1 lakh.
- 4. Top-Up Premium on ULIP is also eligible for tax deduction
The motivation behind top-up premiums is to leverage your policy’s well-performing investment component or increase life cover. It is a premium that you pay over and above your regular premium at any time within the policy. These top-ups are eligible for tax deductions under Sections 80C and 10D of the Income Tax Act, 1961.
- Tax-Free Withdrawal is Available
There is a clause that allows the beneficiary to collect the sum assured in the case of the policyholder’s demise. They also receive the returns from the ULIP investment plan along with this payout. Section 10 (10) D of the Income Tax Act exempts this payout from taxes.
- Partial Withdrawals are also Exempt from Tax
Once the lock-in period of 5 years is completed, policyholders can make partial withdrawals on their ULIP policies. These partial withdrawals are subject to certain terms and conditions which vary from one ULIP policy to the other. While some policies may offer free partial withdrawal up to a certain limit, others may charge a percentage of the amount being withdrawn. Hence, it is advisable to read the detailed policy document before making a partial withdrawal.
- Tax Benefits for the Long Term
The policyholder can enjoy ULIP tax benefits for a long-term investment. As the lock-in period for ULIP is five years, you gain more by saving tax on premiums for these five years.
Key Features of ULIPs
- Insurance + Benefit: The ULIP investment planhelps in wealth appreciation through returns on maturity and provides coverage benefits to the family members for the entire policy term.
- Switching Funds: ULIP gives you the flexibility to switch between debt and equity funds based on your changing needs. Only limited number of switches are allowed during the policy term, and it generally doesn’t involve any charges. This is a crucial ULIP benefitthat you must consider.
- Premium Redirection: With this feature, you can redirect your premium between the available fund options.
Keep in mind that the charges applicable to all ULIP investment plans include premium allocation, mortality charges, fund management, surrender charges, or policy administration charges among others. It is important to be aware of these in order to make an informed decision.
ULIP investment plans enable you to build wealth and secure your family’s future from a financial standpoint. Furthermore, ULIPs are flexible and offer great returns. However, ensure that you are entirely aware of all policy wordings before making an investment.