A ULIP or Unit Insurance Linked Plan, as the name suggests, is a combination of investment and insurance. In addition to this, ULIPs have become popular over the years because they are effective as a tax-saving tool. Yes, you read that right! If you are aiming for wealth accumulation, along with insurance cover, ULIPs provide many advantages. ULIPs, or Unit Linked Insurance Plans, are versatile investment plans that provide the power of compounding, financial protection, and help create a balanced investment portfolio. Plus, the plans can provide huge flexibility. For instance, a plan like Edelweiss Tokio Life Wealth Secure+ will also let you include your partner and children in the policy later on in life as responsibilities increase.
Let’s take a look at how ULIPs can help you achieve your goals and save on taxes.
1. Tax Benefit on Premium Paid:
Under Section 80(C), the premium you pay towards your ULIP in a financial year gets deducted from your taxable income up to a limit of ₹1,50,000. The life cover has to be 10 times the value of the premium paid in a year.
2. Tax-free Partial Withdrawals
If you withdraw money from your investment plan after the 5-year lock-in period, and if the amount withdrawn is less than or equal to 20% of the fund value, you don’t need to pay taxes.
3. Tax-Benefits on Maturity
If your policy was issued before February 1, 2021, you can avail a tax-free maturity amount as per Section 10(10D). This is applicable only if the annual premium is less than 10% of the sum assured for the policies issued after April 1, 2012. For policies before April 1, 2012, this limit is 20%.
However, if your plan came into effect after February 01, 2021, tax exemption is only possible when the annual premium is less than ₹2.5 lakhs in aggregate. If it exceeds that amount, the maturity proceeds will be taxed as capital assets. The exception to this rule is any amount received by your nominee in the event of your sudden death as a policyholder. However, in a keyman policy, this exemption is not applicable.
4. Deductions on Top-Ups
You can increase your investment and minimise your tax liability through periodic top-ups. This allows you to buy more units in the investment plan. These top-ups are also deducted from your taxable income under Section 80(C).
ULIPs can thus offer multi-dimensional benefits compared to other investment plans. You even have the flexibility to switch between equity and debt funds. However, such fund switches are taxable now. Make sure you understand all the terms and conditions before purchasing a plan. Another important thing to know is that ULIPs are an instrument of choice for most of the people over traditional insurance, mutual funds and even PPFs. The reason being, while life insurance provides protection, it does not help you build money. Mutual funds, on the other hand, provide outstanding returns and allow you to develop your wealth while excluding insurance coverage. The advantages of a ULIP are that it bridges this gap while also providing you with the extra benefit of increased tax savings.
