Ever since the global world witnessed the pandemic, individuals have started looking for investment options to secure their financial positions and protect their families simultaneously. And ULIP plans are considered one of the most preferred options. It is a one-stop solution for various financial needs. Moreover, it offers various flexible features to customise the plan based on your financial needs. The plan also qualifies for various tax* provisions under the Income Tax Act, 1961.
Therefore, if you plan to invest in a ULIP plan, you must understand the features to maximise the returns while saving on tax. So, let us get started right away!
What is a ULIP policy?
The Unit Linked Insurance Plan(ULIP) plan is a life insurance comprehensive plan that provides a life cover and market-linked returns on investments. The policy also allows you to invest in the financial market based on the risk profile.
The ULIP plan also allows switching between the funds based on your preference and economic conditions. You can pay the premium for such a policy as a lump sum or regularly for a limited period. We at Tata AIA provide the plan with the choice of systematic investment through a portfolio strategy referred to as the Enhanced SMART. With an effective plan and investment strategy, you can make profitable returns with our expert ad advice.
Now that we have a brief about the plan let us understand the tax benefits for a better and smart investment. Here are seven important things to know about the ULIP tax benefits.
Tax Benefits of ULIPs
- Tax deduction - Section 80C provides a tax* deduction for investments in various financial products such as life insurance, fixed deposits, pension plans, etc., up to ₹1,50,000. Therefore, the premium amount paid towards the plan qualifies for a tax deduction. However, it is restricted to 10% of the capital sum assured. It means the premium is applicable for tax deduction benefits when the annual premium does not exceed 10% of the sum assured.
- Tax deduction on top-up - If you prefer to increase your investment in the plan for increased benefits during the policy tenure, the new premium payable qualifies for a tax deduction if it satisfies the necessary conditions as stated above.
- ULIP tax exemption - Section 10(10D) provides a tax exemption on the sum received from the ULIP policy. However, an amendment is made to such a tax provision in the Finance Bill, 2021.
According to the amendment:
- For ULIP policies issued before 1 February 2021, the sum received will qualify for tax exemption if the premium does not exceed 10% of the actual capital sum assured. It is a case referred to as the excess premium ULIP plans.
- For ULIP plans issued after 1 February 2021, the sum received will qualify for tax exemption on satisfying the above condition while the premium does not exceed ₹2,50,000.
- if you have purchased multiple ULIP policies, then the aggregate of the premium paid should not exceed the threshold limit of ₹2,50,000. Therefore, you can invest in varied ULIP plans based on equity, debt or hybrid funds with a low premium and receive more returns while saving on tax.
- For ULIP policies issued before 1 February 2021, the sum received will qualify for tax exemption if the premium does not exceed 10% of the actual capital sum assured. It is a case referred to as the excess premium ULIP plans.
- Tax exemption on the entire sum received and partial withdrawal - If the proceeds from your plan qualify for the tax exemption, the total sum, which includes the maturity benefit and any bonus1 issued by the insurance provider, will be tax-exempt. ULIP returns tax-free benefit is applicable on the partial withdrawal after the five-year lock-in period.
- Tax benefits in case of policy holder's death - In the event of your death during the policy term, your nominee will get the lump sum death benefit. And, this benefit is liable for the tax exemption, even if it belongs to the excess or high premium ULIP plans.
- Long term tax benefit - The plan has a lock-in period of five years. Therefore, the tax* benefits on deduction and exemption on ULIP plans become applicable when you pay the premium for five consecutive years.
Thus, the plan encourages you to stay invested in the ULIP plan by developing a discipline to invest regularly for the tax* benefits in the long term while enhancing the protection.
- Tax benefit while switching between funds - ULIP plans allow you to switch between the funds during economic downturns to secure your investments. For example, if you have invested in an equity fund, you can switch to a debt fund during an economic slowdown. In addition, this switching between funds does not include an additional tax on ULIP plans that qualify for tax exemption based on the conditions mentioned above.
Conclusion
ULIP plans are considered one of the best forms of financial investments to secure your financial future while protecting the family in case of your unexpected demise. In addition, it provides tax deduction and exemption benefits under the Income Tax Act, 1961. Therefore, we have discussed the conditions to be aware of while purchasing and managing the plan for the maximum tax benefits. So, start investing early, choose the funds based on your risk appetite and ensure more returns while saving on tax in the long term!
L&C/Advt/2022/Nov/2700
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