Financial PlanULIP

Know Every Tax Benefit Offered Under a ULIP Plan

The old adage ‘Nothing is certain except death and taxes’ is indeed true. Though you may not be able to do much about the former, you may certainly work towards reducing your tax liability. The Income Tax Act, 1961, allows for numerous tax deductions and exemptions to reduce your taxable income. One of the best ways to reduce your tax liability is through a Unit Linked Insurance Plan (ULIP).

A ULIP policy is a unique avenue of investment. ULIP benefits are extended towards life coverage as well as return on investment. What’s more is that ULIPs offer tax benefits. This benefit may be claimed under the following three circumstances.

On the premium amount

According to the regulations of the Income Tax Act, ‘any sum paid to keep in force’ the insurance policy may be claimed as deduction. Therefore, the premium amount of your ULIP insurance can be claimed in this regard. Under Section 80C, you may seek tax benefit up to a maximum limit of INR 1.5 lakhs. There is, however, a condition attached to this. The premium amount must not be more than 10% of the sum assured.

You may understand this with the help of an example. Assume that you have purchased a ULIP policy of INR 14 lakhs, and the premium amounts to INR 1.4 lakhs. Since the premium is limited to 10% of the sum assured, the entire amount may be claimed towards tax deduction. However, if a premium of INR 2 lakhs is paid towards a policy of INR 15 lakhs, then the maximum amount that may be claimed is INR 1.5 lakhs. This is because the tax limit under Section 80C is limited to 10% of the sum assured amount.

Section 80CCC is another provision that allows tax deduction towards premiums of a ULIP policy. This section states that an amount paid towards a pension plan is exempt from tax. If the end use of funds is towards retirement planning, you may avail of tax benefit under this section. Remember, the overall limit under Section 80C and 80CCC is INR 1.5 lakhs. Though there is no restriction on investing a higher amount, the deduction will be limited to INR 1.5 lakhs.

It is important to note that the ULIP insurance plan must remain active for a minimum of 2 years in order to claim deductions. In case you discontinue the policy in the second year, tax benefits under Section 80C will not be allowed. This means the tax deduction allowed during the first year is withdrawn, and will be added back to your taxable income in the year you discontinued the ULIP plan. To avoid this, ensure that you sign on the dotted line only if you are looking to invest on a long-term basis.

On partial withdrawals or maturity of the policy

ULIP policies offer great tax benefits under Section 10(10D) on withdrawals. The extent of tax benefit differs on the reason for withdrawal. Following are three instances that may make a withdrawal necessary.

Unfortunate event of death

Life is uncertain. In an event of an unfortunate death during the policy term, your beneficiary will be entitled to receive the sum assured amount. This acts an income replacement, especially if you are the breadwinner of the family. Your loved ones may use the received amount to fulfill financial obligations, such as lifestyle expenses, funeral costs, outstanding debt, or for children’s higher education. The good news is that this death benefit is completely tax-free.

Maturity of the policy

If you have outlived the policy term, you become eligible to receive maturity benefits. You may either receive the value of the unit-linked investment or the sum assured amount, whichever is higher. This payout amount is exempt under Section 10(10D). This is by far the most significant unique selling point of a ULIP policy over mutual funds, because the income earned over mutual funds is fully taxable. Additionally, ULIPs do not attract Long Term Capital Gain (LTCG) tax as opposed to mutual funds.

On partial withdrawals

Investors are allowed to make partial withdrawals from their ULP policy only after the completion of the lock-in period, that is, after a minimum of five years. These withdrawals are limited to 20% of the fund value of the policy at the time of withdrawal. This withdrawn amount may be used to fulfill certain life goals, such as marriage, higher education, purchase of a new home or a new vehicle, among others. These partial withdrawals are completely tax-free, provided that the withdrawals are made after the lock-in period is completed.

On periodic top-ups

If you receive a surplus inflow of cash, say bonus amount received, you may invest it through periodic top-ups. This amount too, like the premium amount, is eligible for deduction under Section 80C. Additionally, you may claim for exemption under Section 10(10D). However, the condition of the premium amount not exceeding 10% of the sum assured amount has to be met.

A best ULIP plan, through the aforementioned ways, aids in saving a significant amount through tax deduction. You may, therefore, avail of these tax benefits along with its other advantages of insurance coverage and high return on investment.

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.
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