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How ULIP Helps You Save Tax

Save tax with ULIP

How ULIP Helps You Save Tax


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February 21, 2020

By : Bajaj Allianz Life

When choosing an investment option, it is important to consider its tax implications apart from the risk and potential returns. The most common type of tax benefit an investment offers is in the form of tax deductions. This reduces your taxable income and thus helps you save tax. In this article we take a look at tax benefits offered by ULIP plans.

3 ways in which ULIP helps you save tax

1. Tax benefit on premiums paid

Section 80C of the Income Tax Act 1961, which allows deductions of up to Rs 1.5 lakh in a year for certain specified investments, is one of the most popular tax saving avenues.

Premiums paid towards ULIP plans are eligible for a deduction of up to Rs 1.5 lakh u/s 80C of the Income Tax Act, 1961. However, there is a condition to avail this ULIP benefit. The premium amount should be less than or equal to 10 percent of the sum assured. So if the sum assured is Rs 10 lakh, and the annual premium is 1.10 lakh, tax exemption will be allowed only up to Rs 1 lakh.

However, this applies only to policies purchased after April 1, 2012. For ULIP policies purchased before April 1 2012, the deduction u/s 80C subject to a limit of Rs 1.5 lakh, can be availed when the premium is less than or equal to 20 per cent of the sum assured. If the premium is more than 20 per cent of the sum assured, then tax deduction is allowed up to 20 per cent of the sum assured, subject to a limit of Rs 1.5 lakh.

2. Tax benefit on maturity

ULIP offers tax benefits on maturity too. The maturity amount plus any bonus amount is tax free according to section 10 (10D) of the Income Tax Act 1961. Here too the conditions are similar to those for availing tax deductions u/s 80C. For ULIP plans purchased after April 1, 2012, the annual premium should be less than or equal to 10 per cent of the sum assured for the entire term. For ULIP plans purchased before April 1, 2012, the annual premium should be less than or equal to 20 per cent of the sum assured for the entire term. In case there is a payout due to demise of the policy holder during the policy period, the death benefit is tax free too.

3. Taxation on capital gains

Union Budget 2018 introduced the Long Term Capital Gains (LTCG) tax under which LTCG of over Rs 1 lakh in equity investments and equity mutual funds will be taxable at 10 per cent, without indexation benefits. ULIP plans allow you to invest in equity funds, but do not attract LTCG tax.

Tax benefits offered by ULIP plans, coupled with other features like a life cover, option to invest in market linked instruments that may help build a large corpus, free fund switches to balance risk and return, and a lock-in period of 5 years which inculcate a savings discipline in the investor, have thus made ULIPs as one of the preferred investment plan for achieving life goals.

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~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.