However, did you know that ULIPs might also help you tick off another essential component of a good financial planning, which is tax-saving? A ULIP may help in claiming tax benefits to the policyholder under Section 80C and Section 10 (10D) of the Income Tax Act, 1961 (the Act) subject to the terms and conditions mentioned therein.[1] Wondering what ULIP tax benefits are and how you may claim them? Here’s a guide on the same.
ULIP Tax Benefits
Now that the basic understanding of ULIPs has been explained above, let’s take a detailed look at the tax benefits they offer:
• ULIP tax benefits on premiums paid[1][2]
Section 80C of the Income Tax Act of 1961 offers considerable ULIP tax benefits in the form of deductions against ULIP premiums. Thus, the premium you may pay for your ULIP may be used to reduce your tax liability by up to Rs 1.5 lakhs if you have opted for old regime.
The major condition one may meet to be eligible for this tax benefit on their ULIP is to have their premium value not more than 10% of the death sum assured if the plan has been bought after 1st April 2012 but before 1st February 2021. If the policy has been issued before the given date, the premium may not be more than 20% of the death sum assured to be eligible.
• ULIP tax benefits on maturity[1][2][3]
When a ULIP matures, one may receive the maturity proceeds without having to pay any taxes on them, as per Section 10 (10D) of the Income Tax Act, 1961.
However, here as well, there may be some terms and conditions you may have to comply with, such as:
- The premium of the ULIP bought after 1st April 2012 may not be more than 10% of the death sum assured to be eligible for Section 10 (10D) ULIP tax exemption. The premium may not be more than 20% of the death sum assured if the policy has been bought before 1st April 2012.
- Furthermore, as per amendment prescribed under budget 2021, if the aggregate annual premium of a policy purchased on or after 1st February 2021 is above Rs 2.5 lakhs (one or multiple polices put together) (High value ULIP’s), then the maturity proceeds may not be tax-exempted either.
- If the ULIP investments are in equity and the long-term returns are above Rs 1 lakh, then they may be taxed under LTCG at a 10% rate. In the case of ULIPs with investments in non-equity assets, the returns above the given limit may be taxed at a 20% rate.
• Tax benefit on the ULIP death benefit payout
If the policyholder were to pass away during the tenure of the ULIP, then the insurer may pay the death benefit payout to the beneficiaries/nominee/s of the policy. The nominees are eligible for the Section 10 (10D) tax benefit on a Unit Linked Insurance Plan or ULIP in the form of tax exemption on the death benefit payout, subject to the terms and conditions mentioned therein.
• ULIP tax benefits of partial withdrawals[2]
A ULIP has a lock-in period of five years within which one may not be able to make any withdrawals.
However, once the lock-in period ends, the policyholder may make partial withdrawals from their ULIP. These withdrawals may not be taxed as sources of income; given that you may not withdraw more than 20% of the total corpus amount. However, note that for High value ULIP’s, if there is any gain on partial withdrawal such gain will be taxable as per underlying assets of ULIP policy.
• Tax Deductions on top-ups[2]
When you increase the funds directed toward a ULIP through top-ups, you may also claim benefit under Section 80C on a top-up purchased on a policy like a ULIP. Top-up premiums may also come under the deduction purview of Section 80C and may help you reduce your tax outgo considerably. However, note that such deduction will be restricted up to 10% of top-up death sum assured and only under old tax regime.
• ULIP tax benefits for the long term
Including a plan like a ULIP in your overall tax-benefits strategy may be a wise idea since it may be a long-term investment that provides long-term tax benefits. It may also pay off, in the long run, to invest in a ULIP in a disciplined manner. This may allow you to continue receiving life insurance coverage, grow potential returns, and receive tax benefits over a sustained period.
Key Features and Benefits of ULIPs
Though ULIP tax benefits are substantial, there may be many other features and benefits offered by the plan that may make it a suitable fit for many policyholders. Let’s look at them:
• Life insurance coverage + investment opportunity –
With a ULIP, you may receive peace of mind from a life insurance policy mixed with the chance to earn returns based on market performance.
• Fund switching –
A ULIP may allow you to switch your investments from debt to equity and vice versa based on your changing needs and risk appetite, as per policy terms & conditions.
• Partial withdrawals –
With the partial withdrawal feature of a ULIP, you may be able to supplement your other sources of income and meet your short-term financial goals after completing the lock-in period of 5 years. Partial withdrawal in ULIPs is subject to terms & conditions of the policy.
• Optional added protection –
You may add extra coverage to your ULIP by opting for riders, such as the critical illness rider, the waiver of premium rider, the accidental death or disability rider, and so on, on payment of additional nominal premium.
Conclusion
To sum it up, a ULIP may be said to be a product that offers financial security for your loved ones and the prospect of creating long-term market-linked wealth. The tax benefit on a ULIP may be another addition to the existing benefits of ULIP. However, it may help you to know that tax benefits may be subject to amendments in tax laws.
To make the most of their ULIP, a policyholder can research the product thoroughly. Reaching out to a tax expert or a financial consultant may also help.
FAQs
1. What are the tax implications if the policyholder surrenders their policy before the lock-in period is complete?[4]
If the ULIP is surrendered before the lock-in period is complete, the tax benefits claimed by the policyholder will be revoked. The deduction claimed under Section 80C previously will be considered as income of the year in which such deduction was claimed and taxed accordingly.
2. Can you claim Section 80D deductions with a ULIP?[5]
Section 80D of the Income Tax Act of 1961 offers tax benefits for health-related insurance policies.
You may be able to enjoy Section 80D tax benefits with your ULIP if you opt for a health-related add-on like the critical illness rider.
3. Are ULIP tax benefits applicable for taxpayers under both tax regimes?[6]
Section 80C and Section 80D deduction benefits may only be applicable if the taxpayer may be paying taxes under the old tax regime, subject to the provision stated therein.
Benefits under Section 10 (10D) are available for taxpayers under the old as well as new tax regime.
References:
1. https://cleartax.in/s/life-insurance-taxability
2. https://www.bajajfinservmarkets.in/insurance/ulip/tax-benefits.html
3. https://www.bajajallianzlife.com/ulip-plans.html
4. https://incometaxindia.gov.in/Pages/tools/deduction-under-section-80c.aspx (please refer to point no. 5 of Section 80C)
5. https://incometaxindia.gov.in/Pages/tools/deduction-under-section-80d.aspx
6. https://cleartax.in/s/income-tax-slabs#:~:text=d.%20Conditions%20for%20opting%20New%20Tax%20regime.
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