ULIPs or unit-linked insurance plans are helpful additions to your financial portfolio. You can use them to create decent wealth over the long term by allocating investments to a mix of equity and debt, along with balanced funds and other market instruments. At the same time, you also get life coverage for a specific tenure along with professional fund management.
Many plans also allow periodic fund-switching and portfolio recalibration to help customers minimize risks in response to market fluctuations. These plans also come with minimum lock-in periods of 5 years in most cases, after which you can withdraw your investment or extend your tenure, depending on your financial circumstances and objectives.
Let us now take a closer look at the tax benefits that are offered by ULIPs and how you can use them to boost your savings.
Key Tax Benefits of ULIPs- A Closer Look
The main tax benefits of ULIPs are listed below for your understanding:
- Tax Deductions Under Section 80C- The premiums that you pay for your policy are tax-deductible up to Rs. 1.5 lakh under Section 80C. However, a few conditions should be noted in this case. The deduction can only be claimed if the premium amount for ULIPs issued on/after 1st April 2012 is lower than 10% of the sum assured chosen for the same. For higher premium amounts, the deduction is limited to 10% of the sum assured.
- Tax Benefits on the Maturity Amount- ULIP maturity benefits are free from taxation under Section 10 (10D), subject to meeting a few conditions. The premium payable for any of the policy years in the tenure should not cross 10% of the sum assured. For those policies issued after 1st February 2021, the exemption will only apply if the premium paid in any of the years for the policy does not cross Rs. 2.5 lakh (aggregate premium). Income from other policies that exceed this limit will be taxed as per the capital gains rules.
- Death Benefit Taxation- Death benefits that are paid to nominees will not be taxable in any scenario. Your nominees will get the whole sum assured without any tax deductions in case of your unfortunate demise within the policy tenure.
- Top-Up Tax Deductions- Once the lock-in period of five years is over, you can invest more in your ULIP via top-ups. You can get tax deductions on these amounts under Section 80C, provided the payments do not exceed 10% of the sum assured.
It is also worth noting that in case you do not pay your premium for two years or in case of a single premium policy, there is a surrender within two years from commencement, earlier deductions will become taxable (as per Section 80C). Another point here is that TDS (tax deducted at source) will apply to the surrender value of the ULIP in case the premium crosses 10% of the sum assured.
Boost Your Financial Prospects with ULIPs
ULIPs are excellent choices for any investor, offering life coverage and attractive long-term wealth creation opportunities through investments. The above-mentioned tax benefits also help you maximize your savings in turn. Use these investment options to boost your financial prospects and stay invested for the long haul to reap the rewards.