One of the reasons investors are drawn to life insurance products is because of the tax-saving benefit provided by them. Smart tax planning is an integral part of financial planning. If you are looking for a financial product that could serve most of your financial needs like wealth creation, financial protection and tax savings, Unit Linked Insurance Plans are the answer.
ULIPs present the best of both worlds
On one hand, a traditional life insurance plan will offer life protection and tax benefits without any avenues for wealth creation. On the other hand, mutual funds offer the opportunity to secure good returns, but don’t have an element of life insurance. Somewhere in the middle of this diverse spectrum lie financial products with tax savings benefits. Among these, tax benefits are significant. The tax advantages of ULIP plans extend across tripartite benefits, listed as follows:
Under a unit linked insurance plan, the premium paid is partially invested in equity, debt or other market instruments, and the rest goes into providing for the insurance protection.
Just like life insurance policies, the premium paid towards a ULIP plan is allowed as a deduction under Section 80C of the Income Tax Act. Up to a limit of Rs 1.5 lakh, the premium amount is deductible from your taxable income.
The specific condition in this regard is that the premium amount paid through the year should be less than 10% of the sum assured under the policy. Therefore, the limit is set at Rs 1.5 lakh or 10% of the sum assured, whichever is lower. Here’s an example: if the sum assured is Rs. 15 lacs and the premium paid is less than Rs. 1.5 lacs, then the entire amount can be claimed as a deduction under Section 80C because this amount equals 10% of the sum assured. On the other hand, if you are paying Rs 2 lakhs premium, the deduction will be capped at Rs 1.5 lakhs itself. This is applicable if the policy is purchased after April 1, 2012. If the policy is acquired before April 1, 2012, the maximum tax deduction can be availed if the premium amount is less than or equal to 20% of the sum assured instead of the current stipulation of 10%.
The ULIP tax benefits also include tax savings on the withdrawals made or amounts received as a part of the policy. These include the death benefit received by the beneficiary upon the death of the policyholder, the sum received by the policyholder upon the maturity of the policy, or any partial withdrawal made by the assured during the policy term. The partial withdrawals, which cannot exceed 20% of the fund value of the policy, are completely tax-free, provided they are made after the completion of the lock-in period.
These ULIP tax benefits in the form of tax-free payouts are akin to the benefit under a conventional life insurance plan. The only difference is that, the payout upon maturity could be higher than the sum assured if the returns generated by the unit-linked investments reaped returns.
This payout is exempt under Section 10(10D) of the Income Tax Act. On the other hand, the payouts under mutual funds are totally taxable.
ULIP tax benefits regarding LTCG
The Long Term Capital Gains Tax (LTCG) was introduced in the Union Budget 2018. It provided for taxation of the profits made through long-term investments made in the market. Unit linked insurance plans continue to be exempt from Long Term Capital Gain (LTCG) tax, and are the only market-linked investment tool outside the purview of LTCG tax.
Apart from this, if you choose to top-up your investments in ULIPs, such additional investments are also eligible for deduction under Section 80C just like the main premium amount. Same conditions apply: the premium amount, including the top-up premium, should not exceed 10% of the sum assured.
These ULIP tax benefits make unit-linked plans even more attractive. There is no denying that Unit-linked insurance plans score over traditional insurance, mutual funds and other financial products. It brings the life cover of the former and wealth creation feature of the latter into a hybrid product that offers tax-saving benefits. The flexibility to make partial withdrawals after the lock-in period, ability to switch funds, and the dual benefits of investment and insurance, are just some advantages of ULIP plans that facilitate the diversification of your financial portfolio.
If you are a keen investor and want to keep track of the performance of your funds, investing in Bajaj Allianz ULIP Plans, available on Finserv MARKETS, will serve you well – under the scheme, you will receive policy statements on a regular basis to assess the performance of your funds and consider switching if you are not happy. Even during such fund switches, you enjoy tax-exemption! What are you waiting for, invest your way to a financially secured future with a unit linked insurance plan which offers great flexibility and high returns.
Not just tax benefits, high ULIP returns is another reason why you should consider investing in such a plan.
To know more on ULIP investments in depth, you can check out these blogs:
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