ULIP benefits are many and varied. Right from giving you the dual benefits of insurance and investments to helping you take advantage of the power of compounding and earning market-linked ULIP returns, there are many reasons to invest in ULIPs. In addition to these advantages, there are also many ULIP tax benefits to look forward to.
To understand the tax-related ULIP benefits better, let us first take a closer look at how ULIPs work.
How do ULIPs work?
Unit Linked Insurance Plans offer policyholders the benefit a life cover in addition to the advantages of investments. Policyholders need to pay a premium to the insurer on a regular basis. The insurer offers coverage to the policyholder, so that in case of the latter’s unfortunate demise during the tenure of the plan, the nominee becomes eligible for the death benefits offered. That covers the insurance component.
As for the investment aspect, policyholders has option of multiple ULIP funds to invest when they purchase a Unit Linked Insurance Plan. The options available include equity funds or debt funds. At the time of maturity, the market-linked returns from these investments are paid out to the policyholder. These are the maturity benefits.
ULIP tax benefits
ULIP tax benefits can be leveraged in three areas, as follows –
1. Tax benefit on premiums:
Under section 80C of the Income Tax Act, 1961, the premiums that you pay for your ULIPs each financial year can be claimed as a deduction from your total income and deduction is restricted up to Rs. 1.5 lakh. If policy is not satisfying the Section 10(10D) conditions, amount of deduction under Section 80C is restricted up to 10% of capital sum assured for policies issued on or after April 1, 2012 and for policies issued before April 1, 2012 amount of deduction is restricted up to 20% of capital sum assured.
2. Tax benefits on maturity:
Section 10(10D) of the Income Tax Act, 1961, explains these benefits. Let’s take a closer look at the ULIP tax benefits on maturity.