Many investors in the market invest in various financial instruments with the primary objective of receiving good returns. They consider the performance of myriad asset classes and invest in the ones which will bring the maximum profits to them. However, there is one other objective which these investors keep in mind – to save tax. There are several investment products that can bring in considerable tax benefits. But, if one is to look at the various other advantages that come with it, nothing beats ULIP tax benefits. As compared to mutual funds or other pure investment products, a ULIP offers multiple kinds of tax benefits. This is largely because a ULIP is firstly an insurance product.
What is a ULIP and how does it function?
A ULIP or a Unit Linked Insurance Plan is an insurance policy unlike any other: it offers the policyholder a chance to invest in market-linked financial instruments while ensuring a life cover for themselves. If the policyholder suffers a demise, their loved ones get the sum assured for their financial wellbeing.
The premium for a ULIP plan is divided into two elements – one goes towards securing the life cover, and the other is invested by the insurer into different assets of the policyholder’s choice. One can invest in equity funds, debt funds, or a combination of both as per one’s risk-taking capacity. ULIPs also offer the opportunity to switch funds if you want to transfer your investment from one asset class to another. If you want to get an estimate of the returns you might get from each asset class, you can take the help of a ULIP return calculator.
Tax-saving benefits of a ULIP
Now, let’s look at how beneficial a ULIP is when it comes to tax-savings:
Premiums eligible for tax deductions
Since a ULIP is considered an insurance product, one can claim for tax deductions up to Rs 1.5 lakhs against their ULIP premium under Section 80C. This is not only applicable on the part of the premium that goes towards the life cover, but also on the part used for investment.
Furthermore, if you have taken a critical illness rider and are paying premiums for the same, you can claim for deductions on them, too, under Section 80D of the Income Tax Act.
Tax exemptions on death benefit pay-out
The loved ones of the policyholder are eligible to receive the death benefit pay-out if the life assured passes away under unfortunate circumstances as prescribed in the ULIP policy. This pay-out is exempted from any taxation under Section 10 (10D) of the Act. This takes ULIP tax benefits to a new level and ensures that your family can benefit from the pay-out in your absence and pursue their dreams with dignity without any worry of taxation.
Tax exemptions on partial withdrawals and maturity proceeds
Once the usual lock-in period of a ULIP is complete, you can make partial withdrawals on your policy without attracting any taxes. And when you receive the maturity benefit on surviving the policy, you can enjoy the returns worry-free, as that too, is exempted from taxation.
Note: As per changes in tax laws, the maturity proceeds on ULIPs bought after February 1, 2020, are tax-exempted only if the annual premium was below Rs 2.5 lakhs. For premiums above this amount, the proceeds may be taxed at the rate of 10% on returns above Rs 1 lakh.
Other benefits of a ULIP:
- Encourages long-term approach
A ULIP has a lock-in period of five years. The policyholder cannot make any withdrawals within this period, which encourages the policyholder to take a long-term approach in finances. This inculcates financial discipline and rigour which helps one in other areas, too.
- Allows one to switch funds
If you believe that the market is not going to perform well in the near future, you can divest your money from equity funds and get it switched to debt funds. You can also switch from debt to equity if you are under the impression that the market will be experiencing a high soon, making it a ripe time for gaining returns.
- Protects further with riders
One can take their protection against life’s uncertainties to a higher level by opting for riders such as waiver of premium rider, accidental death rider, critical illness benefit rider, and so on.
Along with using the ULIP return calculator, remember to consult a financial expert to get a better picture of your investment returns, as they are subject to market risks.