Unit Linked Insurance Plans, or ULIPs, are investment and insurance tools that include life insurance as a benefit for life assured. Tax-saving benefits, which are available both during the policy term and at maturity, are one of the special features of ULIPs.
7 important things to know about ULIP tax benefits:
In addition to offering superior returns and having shorter lock-in periods, ULIPs are well-liked tax-saving tools. Let's examine seven aspects of ULIPs' tax advantages:
Tax savings on paid premiums for ULIPs
Sections 10D and 80C of the Income Tax Act, 1961 allow policyholders to deduct up to Rs. 1, 50,000 in taxes from the insurance premiums they pay for ULIPs. Keep your ULIP policy active for another five years to avail yourself of ULIP tax benefits.
Tax benefits of ULIPs for maturity
Market-linked investment plans (ULIPs) provide maturity amounts that are tax-free in accordance with current regulations, such as section 10 (10D) of the Income Tax Act of 1961.
If the policies are purchased between April 1, 2012, and February 1, 2021, the premium must be less than 10% of the sum insured in order to qualify for tax benefits at maturity.
If the yearly premium is less than 20% of the sum insured, the maturity amount for those who purchased plans before April 1, 2012, will be tax-free.
To qualify for tax benefits at maturity for plans purchased after February 1, 2021, the total amount of premiums paid must be less than Rs. 2.5 lakh. The death benefit is likewise exempt from income tax deductions in the event of the life assured's passing. It should be mentioned that as of February 2021, ULIPs are no longer exempt from Long Term Capital Gains Taxation under Government of India (GoI) regulations (LTCG).
The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.
Death benefit withdrawals are tax-free
The family of the policyholder is entitled to a sum insured amount in addition to the returns produced by ULIP plans in the terrible event of the policyholder's passing. According to Section 10(10D) of the Income Tax, the dividend is exempt.
Benefits from taxation of partial withdrawals from a ULIP plan
ULIPs provide for tax-free partial withdrawals. After the lock-in period has ended for 5 years, you are not obligated to pay taxes on withdrawals from ULIP plans. The limitation is that the withdrawal amount won't be greater than 20% of the fund's worth or amount.
By purchasing top-ups, ULIP gives customers the ability to expand their investments. Sections 80C and 10(10D) of the tax code permit income tax deductions for these top-ups. You can use a ULIP Calculator to estimate future returns and the value of a ULIP investment.
Long-term tax advantages
For a long-term investment, you can benefit from ULIP tax benefits. You benefit from the tax savings on your premiums for at least five consecutive years during the lock-in period, which is around five years. You can continue to receive tax benefits for ULIPs if you stick with your current policy.
Under a single plan, ULIP provides investment, life insurance, and tax advantages.
Compared to mutual funds, PPFs, and other standard insurance plans, unit-linked insurance plans are highly advantageous. Although it provides life insurance, it does not assist in wealth creation. ULIP, in contrast, intends to build a bridge and give you the added benefit of tax savings.
Key characteristics and advantages of ULIPs
Select and change between funds
During the policy tenure, ULIPs permit moving between equity and debt funds at any moment. A set number of switches are permitted without incurring any additional fees within a fiscal year. If you want to learn more about whether your ULIP plan includes free switches, it is advisable to consult the policy brochure and other papers.
The initial lock-in duration for all ULIP plans is 5 years. After the lock-in period, a policyholder may choose a certain number of withdrawals from the accruing amount. No further fees are necessary for you to pay.
Transfer of premiums
You can switch your future premium payments amongst the available fund options whenever you invest in ULIPs. You must state the policy number and the type of fund you are directing your premium payments. The portion of the premium that is distributed to each type of fund can also be specified.
ULIPs give you a chance to take advantage of tax planning advantages to meet your wealth-creation objectives and secure the future of your family. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.