What Tax Benefits You Can Claim on ULIPs?
When you invest in a financial instrument, your main objective would be to gain good returns on the money you have invested. Some instruments are purely for investing purposes. An instrument such as a ULIP offers you dual benefits of investment and insurance. Even if you are able to enjoy these benefits, chances are that what you pay, or gain could get taxed. However, with ULIPs, you get different types of tax benefits that other financial instruments do not offer. So, what are these tax benefits? Read more to get a better understanding.
What is a ULIP?
A unit linked insurance plan is a type of life insurance policy. In this policy, you get to enjoy the dual benefits of investment and insurance under the same policy. In the investment part, you get to invest in equity funds and debt funds. This investment done is based on your risk appetite and goals. In the insurance part, the insurer provides life insurance cover to your family. They get death benefits in the event of your untimely death. The money used for investment and insurance comes from the premium you pay for the plan.
What tax benefits can you enjoy in ULIPs?
The following are the ULIP tax benefits that you can enjoy with this plan:
- Tax exemption on maturity benefit
In ULIPs, a part of the premium is invested in two funds: equity and debt fund. You can invest in either a single fund or both the funds, based on your risk appetite and requirement. Equity funds carry a high-risk factor and provide higher returns. Debt funds carry a lower risk factor and provide low or medium returns. The returns that you gain from your investment get compounded to the maturity benefit of the policy. This ensures you get a greater maturity benefit with the help of investments. This maturity benefit is eligible for tax deduction under Section 10(10D) of the Income Tax Act.
- Tax exemption on premium payment
In ULIPs, you can pay your premiums at different intervals as per your convenience. You have the option of doing monthly payment as well as yearly payment. The premiums are eligible for tax deductions under Section 80C of the Income Tax Act. This exemption can be availed on premium payments of up to Rs. 1,50,000. If you were to make a one-time premium payment that exceeds this limit, it would get taxed.
- Tax exemption on partial withdrawal
You have the option of doing partial withdrawals from ULIPs. This withdrawal can be done once the lock-in period of 5 years ends. There is no provision of doing a withdrawal during the lock-in period. Once you are eligible for partial withdrawals, you can withdraw an amount up to a limit set by your insurer. This withdrawn amount is also eligible for tax exemption under certain conditions of Section 10(10D).
Do ULIPs give better tax benefits?
Compared to other financial instruments such a mutual funds or fixed deposits, ULIPs have better tax benefits. In mutual funds and ELSS, the tax levied on returns is much greater depending on the duration. This means you end up paying a large chunk of your returns just on tax. That is not the case, however, in ULIPs. As there are tax exemptions on premiums and returns, you end up saving a lot than spending it. This also promotes the product among investors, as many of them look for great incentives in financial instruments that are used for investment.
These are the tax benefits that you can avail when you decide to invest in ULIPs. Do keep in mind that there are types of plans that you can select from. So, before you invest in one, it would benefit you to get in touch with your insurance advisor and get to know about the plans and tax benefits in them. Similarly, you can take advantage of the ULIP calculator from your insurer’s website before investing in a plan. This would help you in getting a better idea about what kind of plan would be suitable as per your budget and needs.