What You Must Know About Tax Benefits of ULIPs in India
ulip taxation
A unit-linked insurance plan or ULIP is a well-known tax-saving investment avenue that offers dual advantages of life insurance and wealth accumulation. It offers more returns than fixed deposits, NSC and tax-saving post office deposits although they all have the same lock-in period of 5 years.
In India, ULIPs have quite affordable charges, several switches between the available fund alternatives and diversified return options. These benefits make the plan a favourite investment avenue for investors of different risk appetites. It is even chosen by employers as a group insurance policy. Besides the mentioned features, tax benefits are another great advantage of this plan.
Want to know in detail about the tax benefits associated with a ULIP plan? Here’s a look.
Tax Benefits on Premium Paid and Maturity
According to Section 80C and 10D of the Income Tax Act of India, you can get a tax deduction of up to ₹1.5 lakh on the premium paid towards your ULIP policy. Make sure to remain invested in the plan for at least 5 years to enjoy all its perks including tax benefits.
A unit-linked insurance plan is the sole market-linked investment option that doesn’t have a tax liability even after maturity. Therefore, you can save tax in the following ways:
- On your premium payments
- On receiving the maturity amount
Keep in mind that the premium paid should be less than 10% of the sum assured so that you can enjoy tax exemption when the policy matures.
Tax-Free Withdrawals
You can make tax-free withdrawals from a ULIP plan in case of the insured person’s unfortunate demise. In that case, the family will receive the sum assured along with the returns from the policy. The payout is not taxed.
You can also get tax-free partial withdrawals from the plan. When you withdraw money from the plan after the 5-year lock-in period, you don’t have to pay taxes on it. For that, you must ensure to withdraw an amount that is up to 20% of the fund value.
Tax Deductions on Top-Ups
A unit-linked insurance policy even lets you increase the value of your investment with the help of periodic top-ups. On these top-ups, you can get tax deductions according to Sections 10D and 80C of the Income Tax Act.
Long-Term Tax Benefits
If you invest in a ULIP plan over a long period, you can get significant tax benefits. Since the plan has a lock-in period of 5 years, you get the chance to save tax on your premium payments for a minimum of 3 consecutive years. If you decide to remain invested in the plan, you can receive further tax savings over the coming years.
Whether you choose a ULIP for yourself or your employees (as a group insurance policy), the discussed tax benefits can be availed by the policyholder. In addition to the potential to generate a significant corpus over a long period, the tax benefits associated with this kind of plan make it an ideal investment avenue. Just make sure to buy the plan from a reputed insurance provider in India.
