Negosentro | Tax Benefits Of Unit Linked Insurance Plans | One of the best tax-saving investing tools accessible to investors today is United Linked Insurance Plans (ULIPs). It provides both money-building and life insurance protection as rewards. Rarely do you come across an investment option that can offer all the advantages of a ULIP plan. With the same 5-year lock-in period, it offers you higher yields than tax-saving fixed deposits, NSC, and post office savings. The best aspect is that your maturity benefit is tax-free, and your ability to deduct your ULIP premium payments from your taxes.
View the typical returns that ULIPs with the same 5-year lock-in term typically offer. The returns are comparable to those from the National Pension Plan and Equity-Linked Savings Plans (ELSS).
ULIPs are unquestionably a fantastic tax-saving tool in your arsenal, aside from having a short lock-in time and offering good returns. Let’s now examine the things you need to understand about the ULIP tax benefits.
- Tax advantages associated with ULIP premium payments: First off, sections 80C and 10D of the Income Tax Act allow you to deduct up to Rs. 1.5 lakh from the policy premiums you pay for ULIP plans. To benefit from tax exemption and the benefits of a ULIP plan, be sure to keep your ULIP policy active for at least 5 years. Tax advantages for ULIPs at maturity: The only market-linked investment instrument that is tax-free even after maturity is a unit-linked insurance plan. As a result, you avoid paying taxes on both the premium and the maturity amount. To qualify for tax exemption at maturity, the premium amount must be less than 10% of the amount insured.
- Tax-free withdrawals upon death: In the event of the policyholder’s passing, the family will get the sum promised plus any gains made by the ULIP plan. According to income tax regulations, this payment is exempt. Tax-free partial withdrawals: Even partial withdrawals are tax-free in a unit-linked insurance plan. After the five-year lock-in period, you are not required to pay taxes on withdrawals from ULIP plans as long as the withdrawal amount does not exceed 20% of the fund value.
- Top-up deductions: ULIPs provide investors with the choice to enhance their investment by purchasing recurring top-ups. Sections 80C and 10D of the tax code permit income tax deductions for these top-ups. Protection from long-term capital gains tax: ULIPs are not subject to the long-term capital gains tax, whereas gains from shares, equity mutual funds, and ELSS beyond Rs. 1 lakh are.
- Lengthy-term tax advantages: If you have a long investment horizon, ULIPs can provide you with long-term tax advantages. Since ULIPs have a 5-year lock-in term, you benefit from tax savings on insurance premiums that continue for at least 5 years. Over time, if you stick to your policy, you could accrue extra ULIP tax benefits.
- Flexibility to switch between funds: ULIPs offer investors the flexibility to switch between different funds, including equity, debt, or a combination of both, depending on market conditions and their investment objectives. This allows investors to optimise their returns and manage their risks better. The good news is that switching between funds within the same ULIP policy is tax-free. So, investors can make changes to their investment portfolio without worrying about any tax implications, which is not the case with other investment options such as mutual funds. This tax-free switching facility can help investors maximise their investment returns while minimising their tax liabilities.
Traditional insurance, mutual funds, and PPFs are outperformed by unit-linked insurance plans. Although it may offer life coverage, life insurance doesn’t aid in wealth accumulation. On the other hand, mutual funds give you the chance to earn significant returns and increase your wealth without any insurance protection. The advantage of a ULIP plan is that it fills in this gap while also providing you with more tax savings. Tax exemptions and tax-free withdrawals at maturity or partial withdrawals are available to you. The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Unit Linked Insurance Plans (ULIPs) provide a unique investment opportunity that offers both insurance coverage and market-linked returns. ULIPs offer various tax benefits to investors, which makes them an attractive investment option.
ULIPs allow the policyholders to switch between different funds based on their investment objectives and market conditions, providing flexibility and customisation to the investors.
Overall, ULIPs offer a combination of investment and insurance, with the added benefit of tax savings. However, investors should carefully evaluate their investment objectives and risk profile before investing in ULIPs, and consult a financial advisor for personalised guidance. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
* Currently, there are 2 tax regimes in India – new and old. To get the tax benefit you desire, choose the correct one after consulting an expert. You can opt for a regime change during the next financial year.