ULIP Tax Benefits - Tax Saving Investment Option

Table of Content

1. What Is a ULIP?

2. What You Need to Know About ULIP Tax Benefits

3. Key Features and Benefits of ULIPs

In this policy, the investment risks in the investment portfolio is borne by the policyholder

What Is a ULIP?

Unit-Linked Insurance Plans (ULIPs) are financial tools that offer investment avenues while providing life insurance coverage. When you purchase a ULIP, the premium you pay gets split into two parts. A portion goes towards providing insurance coverage. The rest gets invested in funds of your choice. You can select debt, equity, or balanced fund options based on your future financial requirements and risk appetite. You pay regular premiums, based on the selected schedule, to build a corpus over the policy tenure. If anything happens to you during this time, your beneficiary or heir receives the life insurance payout.

What You Need to Know About ULIP Tax Benefits

Premium Deductions

The premiums you pay for your ULIP are eligible for tax benefits under Section 80C^# of the Income Tax Act 1961. You can claim a maximum deduction of Rs. 1,50,000 per year under this section. However, it needs to be noted that you are only eligible for the deduction if the premium amount, for a ULIP issued on or after 1st April 2012,   is  less than 10% of the death sum assured selected for the plan. For higher premiums, the deduction gets capped at 10% of the death sum assured

Maturity Benefits

Proceeds received on surrender/partial withdrawal/maturity of ULIP plan are exempt from tax subject to provisions mentioned in Section 10(10D)^# i.e if the premium payable for any of the years during the policy term does not exceeds 10% of the death sum assured.

In addition to the above, for policies issued after 1st Feb 2021, tax exemption on maturity proceeds will be available if premium paid in any of the years towards such matured polices does not exceed Rs.2,50,000. Out of the total matured policies in a financial year, exemption u/s 10(10D) will be available only towards those polices who’s aggregate premium in any years does not exceed Rs. 2,50,000/.

Income from rest of the policies exceeding the mentioned limit will be chargeable as capital gains.

Death Benefit

The death benefit paid to your beneficiary or nominee is not taxable. They will receive the entire sum assured without having to pay any tax.

Partial Withdrawals

ULIPs enable you to make partial withdrawals under certain circumstances to deal with financial emergencies. You can withdraw a percentage of the accumulated corpus after the five-year lock-in period, subject to tax applicability in accordance with Section 10(10D) as mentioned above.

Deductions on Top-Ups

Once you complete the five-year lock-in period, you can choose to invest more money into your ULIP through top-ups. You are eligible to claim tax deductions against the top-up amount under Sections 80C.  To enjoy these benefits, you must ensure that the premium amount does not exceed more than 10% of the sum assured.

Long-Term Tax Benefits

ULIPs have a lock-in period of two years under the Income Tax Law. Hence, it is advisable to stay invested in ULIP plans for long term. In case the premium is not paid for 2 years or in case of single premium plans, policy is surrendered within 2 years of its commencement, deduction availed earlier (at the time of premium payment) under Section 80C will become taxable.

Insurance, Investment and Tax Savings

ULIPs offer investment opportunities while providing life insurance coverage and tax benefits. These plans help in financial planning while offering protection to your loved ones and providing tax savings in the present.

Key Features and Benefits of ULIPs

Provides Insurance Plus Investment Benefits

ULIPs enable policyholders to invest in various funds and build a corpus for long-term financial goals while providing protection through life insurance coverage. 

Allows Choosing and Switching of Funds

When you invest in a ULIP, you have the liberty to choose where your money gets invested. You can select funds based on your financial goals and risk appetite. You can also make fund switches to take advantage of market fluctuations and cater to your dynamic needs.

Partial Withdrawals

While investing in your ULIP, you may require funds in an emergency to deal with education or other expenses. ULIPs allow you to make partial withdrawals after the five-year lock-in period, as long as you meet a few conditions. The withdrawals allow you to keep your investment active while dealing with present needs.

Premium Redirection

ULIPs also provide you with the option to redirect future premiums to different funds. You can use this to your advantage to secure your investment as it gets closer to the end of your policy tenure. 

ULIPs are unique financial products that offer three advantages. Firstly, they allow you to build a corpus for the future. You can select how your funds get invested based on your risk appetite and future goals. Next, these plans offer life insurance coverage. It helps safeguard your family’s financial future during a difficult time. Thirdly, these policies offer multiple tax benefits, allowing you to save for the future while maximising tax savings in the present.

ARN - MC/07/23/3099