Financial instruments that allow investment are primarily used for wealth accumulation. Mutuals funds and ELSS are a few examples of instruments used for investment which allow the investors to grow their wealth over time. While they might provide good returns, what you earn gets taxed. This, however, is not the case with a ULIP. ULIPs are great tax-saving instruments that offer you the dual benefit of investment and insurance in the same policy. Given below is more information related to this financial instrument and the tax benefits you can enjoy with it.
What is ULIP?
A unit linked insurance plan is a type of life insurance policy, in which the policyholder can invest their money to grow their wealth. This is not the only benefit of the policy though. You also get the benefit of life insurance cover in the same policy. This cover is beneficial when it comes to protecting your loved ones financially from different life risks. The premium of the policy is used for investing in funds for growing wealth and providing the life cover.
What are the tax benefits in ULIPs?
ULIPs are the only financial instrument providing the benefits of investment and insurance in the same policy. A ULIP’s tax benefits are more than most financial instruments. They are:
- Tax benefits on premiums
When you invest in ULIPs, you have different options of paying your premiums. You can do a monthly, quarterly, yearly or a one-time premium payment. The premiums are eligible for tax deductions under Section 80C of the Income Tax Act. Premium payments of up to Rs.1,50,000 are eligible for tax deductions.
- Tax benefits on maturity pay out
In ULIPs, a part of the premium is invested in two funds: equity and debt fund. Equity funds carry a higher risk factor and provide higher returns. Debt funds carry a lower risk factor and provide low to medium returns. These returns get compounded to the sum assured of the policy. So, you get a greater maturity benefit with the help of investments. This maturity benefit is eligible for tax deduction under Section 10(10D) of the Income Tax Act.
- Tax benefits on withdrawals
ULIPs have a lock-in period of 5 years. After the completion of this lock-in period, you become eligible for partial withdrawals. These withdrawals are helpful to take care of urgent expenses or to complete a life goal at a different stage of life. The amount is withdrawn from your investments. When you do a partial withdraw, you sum assured gets depleted; it is restored after a pre-defined time period.
The amount you can withdraw and how many withdrawals you can do in a year varies from insurer to insurer. However, these withdrawals are tax exempted under certain conditions of Section 10(10D). Your insurer may charge you though when you do a partial withdrawal.
Why ULIPs are better in tax savings?
These ULIP tax benefits help you, as an investor, in saving a chunk of money. Compared to ULIPs, the returns you gain by investing in mutuals funds or ELSS get taxed heavily. The tax usually applied on your returns is as high as 10%. For example, if your returns from your investment in a mutual fund are ₹15 lakhs; as per the 10% tax rate, you will end up paying ₹1.5 lakhs as tax on it. This is not the case in ULIPs, and you get full returns without it getting taxed.
This benefit is especially helpful if you have invested a large amount of money in ULIPs, and your expected returns at the end of your policy are also large. When you opt for a long-term policy, the returns increase substantially for the duration of the policy. As these returns will be used for accomplishing life goals, the tax benefits for ULIPs will help you successfully achieve that task.
So, as an investor in ULIPs, these are the tax benefits that you can enjoy with the policy. When you plan your tax filing strategy, these benefits can come in handy in the long run. To know about the other benefits of ULIPs, you can contact your insurance advisor.