ULIP- A Unique Way to Save on Your Taxes

ULIP – A Unique Way to Save on Your Taxes

Want to buy a ULIP? Learn about the different types of investments and tax-saving benefits of ULIPs and make an informed decision before buying them.
ULIP- A Unique Way to Save on Your Taxes
Unit Linked Insurance Plan (ULIP) is a combination of an insurance plan and an investment option. The premium of this insurance-cum-investment plan is divided into two parts: one, the insurance cover and the other, invested in the market, which can specifically be a debt or equity fund. This plan works like a mutual fund but has an additional benefit of providing insurance cover along with the offer of tax benefits.
Similar to mutual funds, there are units allotted to the ULIP holder and each unit is assigned a Net Asset Value (NAV). This assignment is conducted daily depending on the market conditions and the performance of the investment.
Now, you know the fundamental structure of ULIPs, so let’s understand some advantages you gain when you buy these plans.

An Investment-Insurance Package

Let’s face it, managing different insurance policies, mutual funds and other investments can be quite a hassle as you go on to keep track of a lot of things in your busy life. ULIPs give you the perfect insurance-investment package, which cuts down the number of policies and plans you manage. You get returns on your investment, insurance protection as well as tax benefits—all under one plan.

A Low-cost and Affordable Investment Option

When the ULIP came into existence, the high annual charges of these plans received a lot of criticism. The charges for some of these plans were as high as 80% of the first year’s premium. However, in 2010, the Insurance Regulatory and Development Authority of India (IRDAI) introduced a cap of the annual charges of ULIPs. For the first 10 years, the annual charges were capped at 2.25%, making a ULIP a highly affordable investment option for many.

Flexibility

ULIPs are quite flexible and can be customised to suit your preferences. Most ULIPs present the policy holder with the flexibility to switch between funds, reduce or increase the insurance protection, add additional riders, etc. They also allow you to select the equity/debt combination after taking into consideration your risk appetite and investment objectives.
If you are someone who can afford to take risks, a high equity component might turn out to be more profitable for you while others might do well with a debt-heavy investment ULIP. These plans go a step further by allowing you to manage your plan. For example, if the equity markets are over-dynamic, you could shift your investment towards the debt side of the market or vice-versa.

Tax Benefits and Tax Savings on ULIPs

If you’ve approached an insurance or financial advisor about investments, you may be aware that most recommend ULIPs as a good tax-saving plan. This is because ULIP investments give you a tax benefit of up to a maximum of Rs. 1.5 Lacs under Section 80C of the Income Tax Act. This means that up to Rs. 1.5 Lacs could be deducted from your taxable income if paid as a ULIP premium. To add to this, maturity proceeds from ULIPs are exempt from your payable income tax.
However, this benefit comes with a condition: the sum assured or the minimum death benefit should be at least 10x the annual premium. On failing to meet this condition, the aforementioned benefit under Section 80C would be capped at 10% of the sum assured and the maturity proceeds will be taxable.
Unlike mutual funds, the withdrawals on ULIPs can be tax-free. You can withdraw your funds during two phases. These are mentioned as follows:

  • Policy maturity
  • Death of the insured / policy holder

The policy holder can also partially withdraw the funds after placing a request to the insurer. They are liable to get a 100% tax-free death benefit on such an occurrence. The withdrawals on policy maturity also provide an exemption under Section 10(10D) of the Income Tax Act. This is one of the major reasons why ULIPs are more beneficial than mutual funds, as the returns from the mutual funds are taxable.
Most insurance plans give you only protection while mutual funds give you only returns without any protection. However, a ULIP is a truly unique way to enjoy the benefits of both insurance and mutual funds and save on your taxes!

Note: Unit Linked Insurance Plans are subject to market risks and changes in taxation laws

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