To better understand these benefits, let’s start by looking at the answer to the fundamental question - What is ULIP?
This will help you understand how ULIPs work.
What is ULIP?
A ULIP or a Unit Linked Insurance Plan is an investment option that comes with a lock-in period of 5 years. It offers the policyholder the dual advantage of investments as well as insurance. Depending on their risk appetite and their investment goals, policyholders can choose to invest in equity funds, debt funds, etc. . Additionally, policyholders also enjoy insurance coverage from the insurer. In return, the insurer charges periodic payments called premiums.
In case the policyholder passes away during the tenure of the plan, the insurer pays out the death benefits to the nominee.. On the other hand, if the policyholder survives the policy term, they will receive the ULIP plans returns upon maturity of the policy.
As you can see, there are different kinds of benefits offered by ULIPs. Are they taxable? We will answer that question as we explore the EEE tax advantage of ULIPs. So, let us dig a little deeper and find out what the EEE tax advantage is all about.
What does EEE tax advantage mean?
EEE refers to Exempt-Exempt-Exempt. This essentially means that investments in EEE tax saving instruments offer tax exemptions or benefits at three different stages of the investing journey, as follows:
- The amount invested
- The interest or gains earned on the investment
- The maturity value or the amount withdrawn
Therefore, in the context of ULIPs too, investors can enjoy the EEE tax advantage on the premiums invested and the ULIP plans returns. Want to know more about the ULIP tax benefits available? Let us take a look at the details then.
How do ULIPs provide the EEE advantage?
Here is how ULIPs provide the EEE tax advantage.
1. Tax benefits on premiums paid
You can claim the premium that you pay for your ULIPs as a deduction from your total income, as per section 80C of the Income Tax Act, 1961, subject to provisions stated therein. This deduction is restricted to Rs. 1.5 lakh, and it can only be availed if the premium amount is less than or equal to 10% of the capital sum assured (for ULIPs purchased after April 1, 2012). For ULIPs purchased before April 1, 2012, the deduction can be availed if the premium is less than or equal to 20 percent of the capital sum assured.
2. Tax benefits on withdrawals
ULIPs offer partial withdrawal facilities after the lock-in period of five years. The amount withdrawn is tax free in the hands of the policyholder. Additionally, even if the ULIP funds are not partially withdrawn, the amount that is withdrawn at the time of maturity is also tax-free. This is as per the provisions of section 10(10D) of the Income Tax Act, 1961.
The conditions for availing this tax exemption are as follows -
- The annual premium should be less than or equal to 10 percent of the capital sum assured for ULIPs purchased after April 1, 2012.
- The annual premium should be less than or equal to 20 percent of the capital sum assured for ULIPs purchased before April 1, 2012.
In case the policyholder passes away during the tenure of the plan, the death benefits received are tax-free in the hands of the nominee, However tax will be applicable and TDS will be deducted in case of Key man policy (Employer – employee policy).
3. Tax on the capital gains
Union Budget 2018 introduced the Long-Term Capital Gains (LTCG) tax, where gains over Rs. 1 lakh in equity investments and equity mutual funds were made taxable at 10 percent.
Now, Budget 2021 has proposed the LTCG tax on ULIPs purchased on or after February 1, 2021. This is conditional upon the annual aggregate premium being more than Rs 2.5 lakh for all the ULIPS purchased by a person. In that case, ULIP plans returns will not be tax-free. It may be noted that top up premium would also be considered for determining annual premium.
Therefore, the tax exemption on maturity proceeds shall only be available for the ULIPs having an annual premium up to Rs. 2.5 lakh subject to satisfaction of other conditions under Section 10(10D) as mentioned above. For ULIPs (purchased on or after February 1, 2021) that have an annual premium more than Rs. 2.5 lakh, the return on maturity shall be treated as capital gain and charged to tax under section 112A of the Income Tax Act, 1961.
Other ULIP benefits
In addition to ULIP tax benefits, these investments also offer other advantages like:
- Market-linked returns
- The power of compounding
- An avenue for disciplined savings
- Option to switch funds based on changing investor needs
Conclusion
With these benefits and advantages, ULIPs continue to remain lucrative investment options for investors who are keen on meeting their life goals as planned. The presence of many investor-friendly features makes this a preferred addition to any investment portfolio.
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