A unit-linked life insurance plan (ULIP) goes beyond the benefits of regular savings. It can help you uptick a long list of financial objectives. While they are ideal for goal-based savings, ULIP tax benefits make them all the more popular.
And why not? ULIPs offer you 3-way tax benefits. Yes, you heard that right! Along with life coverage and market-linked returns, ULIPs also come with tax benefits. Read on to understand how ULIPs can be a smart addition to your financial portfolio.
Understanding ULIPs
Before we dig into ULIP tax benefits, let us quickly recap them. ULIPs are a unique combination of life insurance and investment. With the goal to create wealth, you pay your insurer a premium. This premium is further divided into two parts. One goes towards the coverage, while the other is invested to get market-linked returns. Unlike other life insurance plans where the maturity amount is fixed, a ULIP allows you the opportunity to get better returns, depending on the market performance.
Depending on your goals and your risk appetite, the investments can be equity, debt or both. Another advantage of investing in ULIPs is that according to your changing requirements or the market conditions, you can switch between different funds. The 5-year lock-in period in a ULIP ensures systematic and disciplined savings, which can help you save for an upcoming financial commitment, a foreign holiday, your child’s education or your retirement.
A very simple and easy way to understand how ULIPs will work for you is you make use of a ULIP calculator. This online tool makes it very easy to make a well-informed decision that aligns with your financial goals. All you need to do is fill in the required details, adjust the sliders to feed in the sum assured, policy period, and the expected rate of return, and click on calculate. In an instant, the ULIP calculator will show you the results.
Understanding ULIP Tax Benefits
ULIP tax benefits area feature that makes this product all the more lucrative. Here’s how you can get 3-way tax advantages:
- ULIP: Tax Deductions Under Section 80C
The premiums that you pay towards your life insurance policy can fetch you tax benefits. Section 80 of the Income Tax Act, which is amongst the most popular sections amongst taxpayers, allows a tax rebate of up to ₹1.5 lakhs in a financial year.
Hindu Undivided Families and individuals can claim these deductions. - Tax Deductions Under Section 10(10D)
The death benefit that is received by the appointed nominee is completely tax-free under Section 10(10D).
Under the Finance Act 2021, some amendments to Section 10(10D) were announced. These changes can affect the taxability of ULIP maturity proceeds. Here’s how: Effective from February 1, 2021, the maturity amounts of ULIP plans that are issued on or after this date will not be taxable if:
- The premium paid is less than ₹2.5 lakhs for any of the policy years.
- You have multiple ULIPs in your name, and the combined premium paid is less than ₹2.5 lakhs.
Keep in mind that, like all equity-oriented investments, ULIPs will attract Long-term capital gains at 10%. However, any returns that you have received before February 1, 2021, will be tax-free.
- Tax-Free Switching In ULIPs
This is one of the major ULIP tax benefits that you can get. ULIPs allow you to switch between the funds that you have. You can easily switch between equity and debt without the worry of any capital gain tax implications.
In regular investments, when you redeem or switch your funds within a period of three years, it will come under the taxability capital gains. However, ULIPs save you from all this hassle, and you can make as many free switches as your insurance provider allows.
Conclusion
It wouldn’t be wrong to say that ULIPs stand out as a versatile financial instrument. They combine the benefits of life insurance with the benefit of potential market-linked returns. What makes them unique is the 3-way ULIP tax benefits. From the premium to fund switching to the maturity proceeds, you can get exemptions from taxes at different stages.
ULIPs offer a comprehensive solution for disciplined savings and wealth creation. Utilizing tools like the ULIP calculator can help in making informed decisions, ensuring that your investment aligns with your long-term financial objectives.