When it comes to investing in India, one instrument that is gaining immense popularity is the Unit-Linked Insurance Plan (ULIP). A ULIP policy is a unique opportunity to build a significant fortune while ensuring a life insurance cover for your loved ones. It comes with many benefits and flexible choices to allow you to grow your investments effectively. Another important aspect of ULIP is its tax-saving properties. Here, ULIP scores over many other investment avenues.
If you consider buying a ULIP or want to know what kind of tax exemptions to expect from your existing plan, read on:
1. No tax on premium
You have to pay premiums to the insurer to stay invested in a ULIP. The insurer uses the premium to invest in different instruments as well as create the life cover. ULIP provides a yearly tax deduction on the premium as per Section 80C of the Income Tax Act, 1961. Here, the upper limit of exemption is INR 1.5 lakh.
2. Tax-exempt maturity benefit
ULIP tax benefits also include exemption on the policy’s maturity value. Not many investment instruments in India have this advantage. However, if you have invested in ULIP, you do not have to pay any tax on the money you get on the policy’s completion. Section 10 (10D) of the Income Tax Act 1961 offers this benefit. However, you need to remember that to get the tax exemption, the premium has to be lower than 10% of the ULIP’s sum assured.
3. Tax-free death benefit
A plus point of ULIP is that it offers both investment and life insurance options. Hence, in case of the policyholder’s demise, his or her nominees get a sum assured death benefit along with the income generated from ULIP funds. This sum is free from taxation under Section 10(10D) of the Income Tax Act, 1961. This means your nominees will get the full amount in their time of distress, enabling them to maintain their lifestyle.
4. No tax on withdrawal
After the five years’ lock-in period of ULIP is over, you can make withdrawals without paying any taxes on the amount. However, this facility is only available on partial withdrawals, as the amount withdrawn cannot be more than 20% of the total fund value.
5. Tax exempted top-ups
You can enhance the ULIP plans returns by buying additional top-ups with the existing policy. The insurance provider permits you to purchase top-ups when you have any surplus money to invest in the funds. As per Sections 80C and 10 (10D) of the Income Tax Act 1961, you get tax exemptions on the top-ups, too.
6. No tax for capital gains
In general, when you make any profit over INR 1 lakh from shares, equity-based mutual funds, and Equity Linked Savings Scheme (ELSS), you are liable to pay Long-Term Capital Gains (LTCG) tax. However, you do not have to pay any tax for the profits earned from your ULIP funds. This is where ULIP has an edge over other investment products.
7. Saving tax with long-term investment
When you continue investing in the ULIP for the long-term, it enables more saving opportunities from tax exemptions. As the premiums are tax-free, it will significantly benefit you to continue the ULIP even after the five-year lock-in period ends.
All these ULIP tax benefits make ULIP an investment instrument that will help you earn higher profits in comparison to most other available options. Remember these exemptions while submitting your income tax return to maximize the savings.
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