Tax planning is one of the main elements of an effective financial strategy. It is all about designing your finances in such a way that your tax liability is limited. It is imperative to include a financial plan in your strategy that allows you to take maximum advantage of the tax rebates and deductions, as specified by the Income Tax Act.
One of the best ways to save on taxes is to include a Unit-Linked Insurance Plan (ULIP) in your financial plan. ULIP is an investment plan that offers dual benefits of capital appreciation and financial protection. You can reap returns from market-linked investments as well as reduce your tax liability with this one financial plan. If planned in the right way, ULIPs can help you to save up to Rs. 1.5 Lakh in taxes.
ULIP combines life insurance and investment plans. A part of the money is used to offer you a life insurance cover while the other half allows you to reap benefits from investments made in equity and/or debt funds. The best part about ULIP is that you get to choose which asset class you want to invest in. Based on your risk appetite and investment objectives. Briefly, ULIP is just like a mutual fund with an additional advantage of life insurance cover.
You can enjoy ULIP tax benefits as exemptions under a multitude of sections under the Income Tax Act. It includes:-
With a ULIP plan, you can enjoy tax deductions up to a maximum of Rs 1,50,000 under the section 80C of the Income Tax Act. However, the total premium paid should be less than 10% of the sum assured. For e.g., If the sum assured for your ULIP is Rs. 15 Lakhs and the premium paid is less than Rs. 1.5 Lakhs, then the entire amount can be claimed as a deduction under section 80C. On the other hand, if your premium is more than 10%, say Rs. 2 Lakhs for a sum assured of Rs. 15 Lakhs, then your tax deduction will be capped at 10%, i.e. Rs. 1.5 Lakhs.
If you have invested in a ULIP retirement/pension plan, the amount invested can be claimed under the section 80CCC up to a limit of Rs. 1,50,000. The overall limit for deduction under both section 80C and 80CCC is Rs. 1,50,000. Although you can invest a higher amount, the deduction will be limited to Rs 1,50,000 for a given financial year.
The amount received on partial withdrawal or maturity of Life Insurance ULIP policy is exempt from tax under Section 10(10D) of the Income Tax Act. However, the premium payable should not be more than 10% of the sum assured. If you have purchased your policy before 1st April 2012, the premium should not exceed 20% of the sum assured for the proceeds to be tax-free.
If your policy is unable to fulfil the prescribed limit anytime during the policy tenure, the future proceeds of the policy are liable to be taxed. This is not valid in case of death. The amount will be taxed at the income tax slab rate applicable to you.
If you have chosen a retirement/pension UILP plan, you can enjoy tax-free commutation of pension under Section 10(10A) of the Income Tax Act. However, the amount received on surrender of the policy and the pension received will be taxable.
To enjoy ULIP tax benefits to the fullest, always remember to pay the premium regularly. If you discontinue the ULIP payments before two years, you will not be eligible for tax benefits under section 80C.
As a matter of fact, ULIP falls under EEE establishment as a tax-saving investment. Generally, the EEE establishment is applicable on long-term investment only, and ULIP being on a popular demand in the market, it is important to understand the tax benefits offered under it. Thus, to help with the same, following are ULIP tax benefits at different stages during the policy term.
Tax Benefits on Premiums
Tax Benefits on Maturity
Tax free income is what makes ULIP an attractive long-term investment. Being exempt from taxes, ULIP is a lucrative tool that is a must have in your financial portfolio.
Let us proceed to understand the eligibility and documents needed when buying ULIP at Finserv MARKETS.
The amount invested in ULIPs is eligible for tax deductions just like various life insurance schemes. Any amount that is paid to keep the life insurance active can be claimed as a deduction under tax. This also includes the various additional costs associated with the premium amount such as processing fees, service tax, and commission.
The deductions can be claimed under Section 80 C and Section 80 CCC. The amount of premium for life insurance is claimed under section 80C, while that towards the pension scheme is claimed towards Section 80CCC. The maximum deduction that can be claimed under Section 80C and Section 80 CCC, of the Income Tax Act, 1961, is Rs. 1.5 Lakh, even if the amount invested by you is higher than this.
One of the main conditions for this is that the annual premium paid by the policyholder should be less than 10% of the sum assured under the ULIP plan.
Let us take an example to understand this better.
Suppose the sum assured is Rs. 18 Lakh and the yearly premium is Rs. 1.4 Lakh, which is less than 10% of the sum assured. In this case, you can avail the entire premium amount as a deduction. On the other hand, if the premium for the same policy is Rs 2 Lakh, the maximum amount that can be availed as a deduction will be Rs 1.5 Lakh.
Besides, if you discontinue paying the premium for your plan within two years, you will not be able to apply for tax deductions. In order to get tax benefits your ULIP plan must be active for at least two years. Hence, it is advisable to always invest in the ULIPs over a long-term horizon.
Budget 2021 made certain amendments to the Income Tax Act, 1961. The new rule states that any gains earned from ULIPs will be treated as capital gains if the annual premium amount exceeds Rs. 2.5 Lakhs. Such a ULIP investment will be taxed at 10% at maturity.
Besides, Security Transaction Tax (STT) will be applicable when redeeming ULIPs. If you (the investor) have different insurance plans/investments, aggregation of the premiums paid towards these policies will be considered when deciding the taxation amount. In all, ULIP will now be treated at par with other equity funds under Section 112A and the provision of Sections 111A and 112A is applicable on the sale/redemption of ULIPs.
However, these changes will be imposed for ULIPs purchased after February 1, 2021. So, if you already have ULIP and pay over Rs. 2.5 Lakhs annually as premium will not be affected by this rule. In other words, you shall continue to get tax exemptions as per the traditional tax regime, even if the premium amount is high.
This summarises our journey on ULIP tax benefits. Get a brief outline on the same by watching the video below
The eligibility criteria for ULIP Plans offered by Finserv MARKETS are as below:
● Investment amount should be equal to or more than Rs. 2,500 (for monthly investments
● Investment amount should be equal to or more than Rs. 6,500 (for quarterly investments)
● Investment amount should be equal to or more than Rs. 12,500 (for half-yearly investments)
● Investment amount should be equal to or more than Rs. 25,000 (for yearly investments)
● The age of the policyholder has to be between 18 to 60 years
The documents required for ULIP application with Finserv MARKETS
● Proof of income - Pay slips, income tax returns, and bank statement
● Proof of address – Driving license, Voter’s ID card, Aadhar card, or Passport
● Proof of identity - Aadhar card, PAN card, or Voting ID card
● Proof of age - Aadhar card, Voting ID card, Passport, or Driving license
Not just tax benefits, high ULIP returns is another reason why you should consider investing in such a plan. If you don’t have a ULIP yet, opt for one with Finserv MARKETS.
The ULIPs available in our Insurance section allows you to build your wealth over time, offers dual benefits – investment as well insurance coverage, tax benefits, protection to you and your loved ones, and so much more.
So, why wait? Choose from a wide range of ULIP investments available on our platform, today!
Here are a few advantages of buying ULIPs:
The policy provides dual benefits of life insurance cover and investments.
You can invest in funds of your choice - equity, debt, or a combination of the two.
You can make partial withdrawals after the completion of the lock-in period.
In case of your sudden demise, the policy pays a lump sum amount that includes life insurance coverage and returns earned on investments.
ELSS is purely an investment instrument wherein you can gain high returns from several equity-oriented investments. ULIP, on the other hand, is primarily an insurance option. The policy provides life insurance cover and investments under it. Overall, the life insurance cover minimises the risk involved in market-linked investments, making ULIP a desirable policy among investors.
According to Budget 2021, if your annual ULIP premium is below Rs. 2.5 Lakhs, then the benefits and returns are non-taxable. You can read more about Budget 2021 by visiting Finserv MARKETS.
The GST rate for the Unit Linked Insurance Plan (ULIP) is 18% and it applies to all the cost heads, including the premium paid towards the policy and fund management charges.
The Formula for calculating absolute ULIP returns is -
[(Current NAV - Initial NAV) / Initial NAV] x 100
This method is considered an effective way to examine your ULIP fund performance.