Ulips provides tax benefits both on premiums and at the time of maturity
Investing into unit linked insurance plans (Ulips) can be a good option for investors as they give numerous tax benefits. This product category from life insurance companies provides investors with saving opportunities along with investment and insurance.
While there are multiple financial products available for tax saving purposes, such as bank fixed deposits (FDs) and equity-linked saving schemes (ELSS) sold by mutual funds (MFs), but for long-term returns and tax efficiency, Ulips can be a better choice
Here are some of the tax benefits of Ulips.
Tax Benefits On Premiums
There are two important provisions of the Indian Income Tax Act, 1961, applicable to Ulips: Section 80C (life insurance premium is tax-deductible) and Section 80CCC (amount paid towards pension plans is tax-exempt).
Sections 80C and 80CCC allow tax benefits up to Rs 1.5 lakh in a financial year. But the yearly premium should be less than 10 per cent of the sum assured. Hence, if the chosen sum assured is Rs 15 lakh and the annual premium is less than Rs 1.5 lakh, the entire amount can be used to avail Ulips tax benefit.
Free Partial Withdrawals
After the lock-in period of five year, policyholders can withdraw a certain amount from their Ulips’ funds and these are tax-free. However, the withdrawal amount can’t exceed 20 per cent of the fund value. Say, someone has a Ulip with fund value of Rs 2 lakh at the end of five years, his annual premium is Rs 30,000 and sum assured is Rs 3 lakh. He can withdraw only Rs 40,000 (20 per cent of Rs 2 lakh). Also, the life insurers may have other limitations such as those on the minimum amount or the number of partial withdrawals made in a year. Therefore, the policyholders must go through the policy document of the Ulip plan to know more about these terms and conditions, while ensuring timely payment of premiums.
Tax Benefits On Maturity
Ulips offer tax-free maturity amount as per Section 10 (10D) of the Income Tax Act, 1961. The only condition is that the annual premium should be less than 10 per cent of the sum assured for the plans purchased after April 1, 2012. For the policies purchased before April 1, 2012, the maturity amount is tax-free if the annual premium is less than 20 per cent of the sum assured. Death benefit in case of death of the life assured is also tax-free.
Savings Through Top-ups
If the annual premium of your new Ulip investment is more than Rs 2.5 lakh, the return that you will get will no longer be tax exempt. However, one can continue to get tax benefits if the annual premium is less than Rs 2.5 lakh. So, policyholders can get a chance to move money from debt to equity or vice- versa, depending on the suitability on the risk profile.
Other Benefits of Ulips
Ulips are the only products with a mix of insurance and investing. There are multiple categories of Ulips, from equity to debt. In equity Ulips, policyholders invest in high-risk equities and stocks of companies. People looking for medium risk can look at debt funds which invest in government securities, fixed-income securities, corporate bonds and other such options. Ulips can also help someone build a retirement corpus. It is crucial to secure a fund for future when you do not have a stable income source. Besides, Ulips’ tax benefits make them a good investment choice for your present financial situation as well.
Rakesh Goyal is the director of Probus Insurance, Insurtech Broking Company.
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.