As an investor, one looks at the various aspects of any investment option before investing. The primary determinant of any investment option is the returns it has historically generated. This helps the investor understand and get a strong idea of how much returns they can expect. However, in your hurry to gain more returns, you must not forget another important facet of a good investment avenue and that is the tax-saving benefits it provides. Otherwise, your returns run the risk of getting eroded into taxes to a great degree.
A ULIP offers the savvy investor the best of both worlds – the reassurance of a life insurance product and the chance to invest in the instruments of their choice. What’s more, ULIPs come with substantial tax benefits as well.
What is a ULIP and how does it work?
A ULIP is essentially a life insurance product that offers the additional feature of investment as well. The premium paid for a ULIP policy is used for the dual purpose of building the life insurance coverage amount andinvesting in various asset classes. As a ULIP policyholder, you can choose the assets you wish your money to be parked into. You can choose from low-risk debt funds, high-to-moderate risk equity funds, and even hybrid funds that offer the best of both worlds.
Your ULIP premium is based on factors, such as age, gender, life cover amount, the kind of ULIP plan chosen, the charges associated with the plan, and so on. Some of these variables are available in the ULIP calculator. You can use this tool to enter the variables and get an estimate of your premium.
Understanding the tax benefits of ULIPs
ULIP tax benefits work in two ways– tax deductions and tax exemptions.
- Tax deductions of ULIPs
As a life insurance product, a ULIP allows you to claim for tax deductions up to Rs 1.5 lakhs against your ULIP premium under Section 80C of the Income Tax Act, 1961. This is applicable to your entire premium, including the amount that goes into investment.
You can increase the tax deductions you are eligible for by opting for the critical illness rider with your ULIP plan. The premium that you pay for this rider permits you tax deductions up to Rs 25,000 under Section 80D of the Income Tax Act, 1961.
- Tax exemptions of ULIPs
When the policyholder passes away under conditions mentioned in the policy, the nominees receive the life cover amount. This amount is exempted from any kind of taxation as per Section 10 (10) of the ITA, 1961. This benefit helps the loved ones deal with the financial consequences of the policyholder’s demise without the worry of taxation.
One can also make partial withdrawals on their ULIP plan once the lock-in period of five years is over. What’s more, the maturity proceeds of your ULIP plan, too, are exempted from taxation up to a certain limit. These ULIP tax benefits make this life insurance-cum- investment product a hard-to-miss avenue for any savvy investor.
However, you must note that these benefits are subject to amendments in tax laws as well as various terms and conditions.
What to know about the tax benefits of ULIPs
- As per recent modifications in tax laws, the maturity proceeds on ULIPs bought after 1st February 2020 are tax-exempted only if the annual premium is below Rs 2.5 lakhs. If the premium is above this amount, the proceeds may be taxed at the rate of 10% on returns above Rs 1 lakh. There might be conditions present on the tax deductions as well.
- These benefits may not be applicable to those who have opted for the new tax regime. Only if you are opting for the old tax regime can you opt for Section 80C, 80D, and Section 10(10D) deductions.
- One must purchase their ULIP plan from an IRDA-registered insurance company to be eligible for these tax advantages.
- If you surrender your ULIP policy before the end of the lock-in period, you run the risk of losing your tax benefits attained till then. You may have to return the tax deductions you had claimed for the years till your surrender.
It is recommended to consult a tax expert or a financial consultant before adding ULIPs to your portfolio, especially if it is for tax-related reasons. Remember to use tools such as the ULIP calculator and the human life value calculator to make well-informed financial decisions.
