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ULIP Tax Benefits - How ULIPs Help You Save on Income Tax?

A Unit-Linked Insurance Plan or a ULIP may be an effective way to tick off two elements from your financial to-do list, at once. For the uninitiated, a ULIP is a type of life insurance policy which provides life insurance coverage and the opportunity to invest in market-linked funds under one product.

Investment plans also act as tax-planning tools, as many avenues help reduce tax liability. There are different types of investment plans, and by choosing the right one, you can invest according to your needs and grow your savings.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 7th July 2024
Modified on: 7th July 2024
Reading Time: 15 Mins
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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.

BJAZ-WEB-EC-02499/23

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

**Past performance is not indicative of future performance.

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.

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

@Term Insurance plan bought online directly from Bajaj Allianz Life Insurance has no commissions involved.

^^The Return of Premium amount is total of all the premiums received, exclusive of extra premium, rider premium and GST & /any other applicable tax levied, subject to changes in tax laws
Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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The Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year.

ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Bajaj Allianz Life Insurance Company Limited is only the name of the Life Insurance Company and Bajaj Allianz Life Goal Assure II- A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN No.: 116L180V02) is only the name of the unit linked insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

Bajaj Allianz Life Goal Assure II - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L180V02)

**Return of Mortality Charges at Maturity (ROMC) is payable at maturity, provided all due premiums have been paid

Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V04)

*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116


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2Above illustration is for Bajaj Allianz Life eTouch II- A Non-Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N198V01) considering Male aged 23 years | Non-Smoker Preferred | Annual Income =>Rs. 15,00,000 per annum | Indian Resident | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 2,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 7,159. 2nd Year onwards premium is Rs. 7,760. Total Premium is Rs. 2,32,199 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly instalments (Lumpsum Payout Percentage : 40, Income Payout Percentage : 60). Income payout instalment opted for 40 years | Premium shown above is inclusive of Online Discount only, no other discounts have been considered and exclusive of Goods & Service Tax/ any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com) carefully before concluding a sale.

**5% Discount applicable for customer's first individual life insurance policy, applicable only on first year’s premium. 5% Discount for salaried customers, applicable only on first year’s premium. 6% Discount on online purchase is available for regular premium payment and limited premium payment frequency, applicable only on first year’s premium.

*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy. Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

^^Get Free Health Management Services upto Rs. 31,000 per year

Health Management Services Frequency Cost (₹)
Doctor Insta-Consultations 3 consultations per month = 36 consultations per year Average cost per session = ₹500
Total cost per year = ₹500 * 36 = ₹18,000
Health Coach
(Diet & nutrition consultations)
1 consultation per month =
12 consultations per year
Average cost per session = ₹500
Total cost per year = ₹500 * 12 = ₹6,000
Emotional Wellness
(Psychologists consultations)
1 consultation per month =
12 consultations per year
Average cost per session = ₹500
Total cost per year = ₹500 * 12 = ₹6,000
Network discounts: Throughout the year Assumption – Total expense on these services throughout the year
Medicines (M) = ₹5,000
Lab-test booking (L) = ₹5,000
Total discounts that can be availed:
M - 10% = ₹500
L - 10% = ₹500
Total per year as per assumption ₹31,000

Note: The above mentioned costs are based on estimated average market price for respective services. T&C apply.

Doctor Insta-Consultations and Health Coach Services are unlimited and the above numbers are assumed only for the purpose of calculation of the yearly benefit.

Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

 

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