Published On : Wed, Apr 7th, 2021

4 Things To Know About The Tax Benefits For ULIP Policy

No other insurance policy is better than a ULIP plan in India if you want a mix of insurance and investment. The goal of a ULIP policy is to provide wealth creation facilities along with financial security for emergencies. Insurance companies put a portion of your investment towards life insurance and the rest into a fund based on equity or debt.

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Thus, if you want to achieve your long-term goals, then it will be beneficial for you to opt for a ULIP policy. These goals may include retirement planning, children’s education or any other essential event that you may wish to save for.

Moreover, a ULIP plan in India is considered one of the best tax-saving investment tools available today. The premium payments for a ULIP policy are eligible for tax deductions.

Let us understand in detail a few things related to the tax benefits of a ULIP policy:

  1. Tax Benefits on ULIP Premiums

Till now, the premiums paid for a ULIP policy entitled you to tax deductions of up to Rs 1.5 lakh under Section 80 C of the IT Act. Furthermore, the maturity proceeds were tax-exempt under Section 10 (10) D. However, there have been changes made recently in the Budget 2021. To understand the difference, read the example given below:

For instance, Mr Raj plans to buy a new ULIP policy on or after February 1, 2021. And when he opts for this ULIP policy, his premium exceeds Rs 2. 5 lakh. In this case, the maturity proceeds will be eligible for taxation as per the new tax rules.

But note that the amount of premium should not be more than 10% of the total sum assured to avail tax exemption on maturity as per IRDAI regulation.

  1. Tax Exempted Withdrawals

In case you are not around anymore, your family will receive the sum assured along with returns yielded by the ULIP policy due to an untoward circumstance. The payable death benefit is exempted from tax as per the tax laws.

Apart from this, most ULIP plans in India allow partial withdrawals during the policy period. So, if you have a ULIP policy, even your partial withdrawals are tax exempted. Thus, when you plan to withdraw an amount from the ULIP policy after the lock-in period, there will not be any tax liabilities. However, it is applicable only when the provided withdrawal amount is within 20% of the fund value.

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  1. Capital Assets

Like the equity-oriented funds, short term capital gains are taxed at 15 % irrespective of your income slab. So, now, if you hold your ULIP policy for a year, your ULIP maturity proceeds would be taxable at 15 %. But in cases where you hold on to your ULIP policy for more than a year, they will fall under the bracket of long-term capital assets.

These assets are currently being taxed at 10% for equity-oriented mutual funds, and thus the same rate will apply to your ULIP policy, as per the new budget. However, the insurance aspect will be unaffected since the death benefit payable will remain tax-exempt without any limit on the annual premium.

  1. Long-Term Tax Benefits

Note that you can reap the tax benefits of a ULIP plan in India with a long-term investment plan. As the lock-in period for any ULIP policy is five years, you can save taxes on the premiums paid and gain from it for at least five years consecutively. You should remember that this will be applicable only if your annual premium is more than Rs 2.5 lakh.

Thus, it will be beneficial for you to continue your policy for better gains from the applicable tax benefit over the years.

These are a few things that you should note about the tax benefits of a ULIP plan in India before you purchase one. Now that you know about them, your next step should be to choose a plan according to your suitability. Although the ULIP plan in India can be further classified into three types:

  • Equity Funds

If you do not mind taking risks, these plans are apt for you. In this ULIP policy, the premium amount you invest is invested in the equity market and bears a more significant risk factor.

  • Balanced Funds

If you are comfortable taking moderate risks for investment purposes, you should go for this ULIP policy. In this plan, the investment portfolio will have a balance of debt and equity funds.

  • Debt Funds

If you opt for a ULIP policy that invests in debt instruments, debt funds come into the picture. The funds in these plans are low risk.

Knowing these aspects about a ULIP plan in India will help you compare them with other saving instruments like monthly income schemes, PPF, NSC’s and others. To know more about ULIP plans’ benefits, you can visit websites of reliable companies like Max Life Insurance. There you can read the policy wordings and check how ULIP policy is suitable for your financial portfolio.