If you are reading this, the chances are that you are exploring ways to reduce your income tax liability and also make some smart investments that help you create wealth.
In recent times, Unit Linked Insurance Plans (ULIPs) have emerged as a popular investment tool to help you save tax. ULIP serve the dual purpose of not only providing you with a life cover but also invest your money for wealth creation. It allows you to invest in a combination of equity and debt funds, thus enhancing returns for you. The ULIP tax benefit is the proverbial icing on the cake.
We explain the tax benefits offered by ULIPs at different stages of the policy:
1. Tax benefit on premium :
The premium paid towards a ULIP plan is allowed as a deduction from the current permissible limit of ` 1.5 lakh under Section 80C of the Income Tax Act, 1961. The only condition is that the premium amount should be less than or equal to 10% of the sum assured. For instance, if the sum assured is ` 50 lakhs and the annual premium paid is more than ` 1.5 lakhs, then the deduction is capped at ` 1.5 lakhs. This is applicable if the policy is purchased after April 1, 2012.
However, if the policy is acquired before April 1, 2012, the maximum tax deduction can be availed if the premium amount is less than or equal to 20% of the sum assured.
2. Tax benefit on maturity :
The best part about ULIPs is that it offers tax-free maturity amount as per Section 10 (10D) of the Income Tax Act 1961. The only condition is that the annual premium should be less than 10% of the sum assured for the plans purchased after April 1, 2012. For the policies purchased before April 1, 2012, the maturity amount is tax-free if the annual premium is less than 20% of the sum assured. Death Benefit in case of death of the life assured is also tax-free.
3. The LTCG advantage :
Additionally, ULIPs continue to be exempt from Long Term Capital Gain (LTCG) tax, which was introduced in the Union Budget 2018. ULIPs are the only market-linked investment tool that continues to be out of the purview of LTCG tax.
The above ULIP tax benefits make it all the more lucrative, and a must-have in your financial portfolio. And with features like switching, lock-in period, top-up and partial withdrawal, it is a preferred long-term investment plan.
Please note that the above tax write-up is for general understanding and reference purpose only. The reader will have to assess the validity and accuracy of the facts, law and content with the prevailing tax statutes and seek appropriate advice from tax professionals before taking any action on the basis of the above information.