There are many modes of investments that you can access in order to grow your wealth. The most conventional modes are mutual funds, recurring deposits, and fixed deposits. However, the money that you invest in most of these financial instruments get taxed one way or another. On the other hand, when you invest in a ULIP, you get many tax exemptions which can help you in saving a lot of money. Read on to know more about the policy and understand the ways in which you can save tax with it.
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What is ULIP?
ULIP is short for a unit-linked insurance plan. It is a type of life insurance policy that provides you with dual benefits of investment and insurance. The premium that you pay for the policy is divided into 2 parts: one part is used in providing the life insurance cover, the other part is used for investing in market-linked funds. Based on your risk appetite and your life goal, you could choose to invest in equity funds, which is a high-risk, high return fund. Or you could choose to invest in debt funds, which is a low-risk, low-to-medium return fund. It is always advised to invest in ULIPs for a longer duration to gain higher returns in order to accomplish your life goals.
What are the tax benefits in a ULIP?
Like every other financial instrument ULIPs also get tax exemptions. Listed below are the parameters that can help you avail ULIP tax benefits:
1. On premium
The premium that you pay for your ULIP policy is tax exempted. It does not matter if the premium up is paid on monthly, quarterly or yearly basis. A premium limit of up to Rs.1,50,000 is tax-exempted under section 80C of the Income Tax Act. This means that the premium that is used for investment and insurance cover does not get affected in any way whatsoever.
2. On maturity benefits
Once your ULIP policy matures, you or your loved ones are entitled to the maturity benefits. These benefits are essentially the sum assured compounded with the returns that you gain from your investments. Under section 10(10D) of the Income Tax Act whatever your maturity benefits are from your ULIP policy are tax exempted. It does not matter if it is you who is getting those maturity benefits or your loved ones, they are tax-exempted.
3. On withdrawals
Your ULIP policy comes with a lock-in period of 5 years. Once this lock-in period ends, you are eligible for something known as partial withdrawals. Partial withdrawal allows the investor to withdraw an amount up to a predefined limit to take care of any immediate expenses or to take care of a life goal at a certain life stage. The amount that can be withdrawn differs from insurer to insurer. Under certain conditions, partial withdrawals are eligible for tax deductions. However, do keep in mind that your insurer will charge you for every partial withdrawal that you make.
Why ULIP is more tax-saving?
When you invest in this policy, you get to enjoy ULIP tax benefits that are mentioned above, in the long run. These tax exemptions help you in saving a lot of money, especially on the gains that you earn from your investments. Compared to ULIP investors, people who invest in mutual funds or ELSS only get to enjoy tax benefits on the premium payments. Their withdrawals get taxed under the Income Tax Act.
The tax that could be applied could go up to 10% of the withdrawal amount. This essentially means that you are paying a chunk of the benefits that you have earned through investments in mutual funds or ELSS as tax, which will reduce your returns immediately. This is not the case when it comes to your ULIPs. Your returns and your benefits are safeguarded from tax the being levied on them.
So, these are the tax exemptions that you can enjoy as a new ULIP investor, especially when you invest for longer duration. You can use the ULIP plan calculator from your insurer’s website to get a rough idea about the plan you should go for.