Things to Know About the Tax Savings Benefits of ULIP

It’s nearly that time of the year, tax season 2022 is almost here. For many, this is a rather taxing period. Taxpayers spend hours sorting through receipts and invoices or look for a well-reputed CA. But, what really exasperates lakhs of taxpayers is, paying a sizeable part of their income to taxes. 

The recent Union Budget announcement contained no deductions for tax slabs under the personal income tax category. This means you need to start looking for new avenues for income tax relief. So, how about exploring insurance plans like ULIP? Here’s everything you need to know about it.  

Unit Linked Insurance Plan (ULIP)

ULIP is a hybrid that combines the benefits of insurance and investment plans. This allows you to invest your money, while financially keeping your family secure, in case of unfortunate accidents. And, the best part? It’s a great way to save on taxes! 

Before getting into the benefits of ULIPs, take a look at how they work. 

1. Based on your preference, you can pay the premium monthly, quarterly, semi-annually or annually, or make a single lump-sum payment. 
2. While one part of the premium acts as your life cover, the other is invested in specific funds. 
3. The insurer will invest your money via various financial instruments like equity, debt, etc. 
4. The number of units you’re assigned depends on the amount invested. 
5. Your capital gains will be calculated as per the ULIP NAV over the course of the term. 
6. At the end of the term, you will receive the ULIP benefits as stipulated in the policy term. 

Tax-Saving Benefits of ULIPs

Here’s why ULIPs are a great option for taxpayers to invest in. 

Save Taxes On Premium 

You can avail tax deductions up to Rs. 1,50,000 on the premium paid for your ULIP policy. This is owing to sections 10D and 80C of the Income Tax Act, 1961.

Single Plan, 3 Advantages 

By choosing a ULIP policy, you’re automatically insured with a life cover, starting to invest towards life goals and indulging in tax benefits. Unlike other plans, which give you the benefits of either insurance or investment, ULIPs provide you with all these in one plan. 

Tax-Free Withdrawals On Demise 

In the event of death, your family will receive the sum assured along with the returns generated by your ULIP-based investments. Under the Income Tax Rules, the sum assured will be exempt from any tax deductions. 

Top-Up Your Premium 

Your top-up for increased returns will be treated in the same way as your primary premium. Just make sure the combined deduction of the two premiums from your income, is less than 10% of your policy amount. Or, under Rs. 1,50,000, depending on whichever is lower. 

Prolonged Tax Benefits 

One of the key features of ULIP is the 5 year lock-in period. This ensures that for at least 5 years, you will be able to relish the joy of saving tax on your premiums. Additionally, you can acquire more tax benefits by continuing longer with your policy. 

Partial Withdrawals Are Tax-Free

In case of sudden expenses, you can always rely on your ULIP policy. Post 5 years into the policy, you can make a partial withdrawal, which under section 10(10D) of the Income Tax Act, is tax-free. However, bear in mind that the amount should not exceed more than 20% of the fund amount/value. 

Additionally, you can also customise your portfolio between equity and debt depending on your risk appetite. So, weigh the potential of these advantages and consider securing your financial future with a ULIP policy today.