As you figure out your financials and figure out how much tax you are likely going to pay in a year, you explore the various options and avenues that can help save taxes. There are certain exemptions that can be claimed and other deductions that are allowed. Among the tools or financial instruments or avenues for such tax-saving are the Unit Linked Insurance Plans, or ULIPs for short.
Very simply, ULIPs are financial instruments that club the benefits of both insurance and investment under a single product. Part of the money you pay as premium goes towards your life cover and the rest goes to a fund. If you are a relatively meticulous investor and would like to keep tracking the performance of your funds, you might consider investing in Bajaj Allianz ULIP Plans, available on Finserv MARKETS that allows you to do so. In addition, it also comes with the option of switching if you are not happy with the sustained performance of the funds.
Apart from this choice and flexibility, one of the many reasons people are drawn to ULIPs is the tax-saving aspect of the policy.
If you are a smart tax-planner, you are likely to consider ULIPs in your financial portfolio. Here’s why:
In the wide variety of insurance and investment products available, ULIPs are uniquely positioned – they have qualities of both and to top it off, Unit Linked Insurance Plans come with three-fold tax benefits, as explained further:
For the amount of premium you pay under a ULIP policy, the tax treatment is similar to any other life insurance product. This means that your premium payment is allowed as a deduction as per Section 80C of the Income Tax Act, subject to a maximum limit of Rs 1.5 lakh. It means that you can deduct the amount of up to Rs 1.5 lakh from your total taxable income if you are paying this sum as premium under a Unit Linked Insurance Plan.
More specifically, the stipulation is that the premium amount can be claimed as a deduction as long as it is less than 10% of the total sum assured under the policy. Depending upon this amount, the limit is either 10% of your policy amount or Rs 1.5 lakh, whichever is lower.
This exemption is provided under Section 10(10D) of the Income Tax Act. What exactly is this? The amount you receive from the ULIPs, whether it is the money received on partial withdrawal or as a death benefit to the beneficiaries upon the death of the policyholder – are all exempt from tax in the hands of the receiver. The specific guidelines here provide that your partial withdrawals cannot exceed 20% of the fund value of the policy. These withdrawals should also not be in breach of the stipulation of the lock-in period. The lock-in period is defined as the minimum time period, 5 years in this case, during which exiting from ULIP will bring you zilch liquidity benefits.
If you decide to top-up your policy, that is, increase the premium amount in return for an increased cover, it is treated the same way as the amount of primary premium. The deduction of the combined amount of your primary premium and top-up premium from your taxable income is subject to the same provision: it should be less than 10% of your policy amount or Rs 1.5 lakh, whichever is lower.
The Long Term Capital Gains Tax (LTCG), introduced in the Union Budget 2018, introduces how long-term investments in the market will be taxed. ULIPs have a benefit over other long-term investments in that it is exempt from the LTCG tax. They happen to be the only market-linked investment instrument that is not subject to the LTCG tax.
This tax-saving season, as you sit down to figure all your possible deductions and exemptions, ULIPs will be your best friends as they help you save on taxes and provide you with life cover – all in one go. ULIP tax benefits are not the only edge they have over other investment avenues; ULIPs come with other useful features such as the ability to switch funds. Did you know that the switching of funds does not impact your tax savings?