How to save Tax with ULIPS

Understanding Taxation in ULIPS

ULIPs, or Unit Linked Insurance Plans, are investment oriented life insurance policies. They help you earn market-linked returns on your investments so that you can build up an inflation-adjusted corpus for your financial goals. Moreover, with the flexibility of partial withdrawals, top-up premiums, switching, etc., you can exercise full control over your investment and manage it as you want to, while also enjoying the ULIP plan tax benefit

While ULIPs give these benefits, they also help you save tax with a tax saving ULIP plan

Yes, you read that right. ULIPs are tax-saving investment avenues that can go a long way in tax planning.

ULIP Tax Benefits

Tax saving under a ULIP policy occurs at different stages. So, here’s a list of all the ways in which you can save tax with ULIPs –

Tax saving on the premium

The premium that you pay to buy the unit linked policy gives ULIP tax benefits. It is treated as a deduction from your taxable income under Section 80C of the Income Tax Act, 1961. The limit of deduction under the section is Rs.1.5 lakhs provided that the premium is within 10% of the sum assured.

If you buy pension ULIPs, tax deduction would be available on the premium amount. However, the ULIP tax deduction section would change from 80C to 80CCC.The limit is the same, i.e. Rs.1.5 lakhs, and it includes the limit of deduction allowed under Section 80C.

Furthermore, if you opt for a critical illness or any other medical coverage add- on or rider with your ULIP, such a premium would be allowed as a deduction under Section 80D. You can claim a maximum deduction of Rs.25,000 which would increase to Rs.50,000 if you are a senior citizen, i.e. aged 60 years and above.

Tax exemption on partial withdrawals

ULIPs allow partial withdrawals from the fund value after 5 years. This not only imparts liquidity, it also gives you a tax exempt source of financing your dreams. The partial withdrawals are not taxed, at all, and you can avail of them when you need funds for your financial needs.

Also Read: Section 80G: Income Tax Deductions for Donations

Tax saving on switching

Switching in simple language means changing investment funds. You might change the funds when the market conditions change so that you can reap maximum gains and reduce the risks. This switching does not attract any tax. So, in a volatile market, if you switch from an equity fund to a debt fund to protect your investments, the amount that you switch would not be taxed. The same holds true if you switch from a debt fund to an equity fund when the market starts rallying. Switching, thus, allows you to manage your investments with the changing market dynamics without incurring any tax in the process.

ULIP Tax Exemption on the Death Benefit

In the case of death during the policy tenure, the death benefit that the ULIP pays is treated as a fully tax exempt income.

ULIP Tax Saving on Maturity

Lastly, the maturity benefits received from a unit linked insurance policy is also subject to tax exemption under the provisions of Section 10(10D) if specified conditions are met. These conditions are as follows –

• The premium paid should not be more than 10% of the sum assured
• The total premium paid, for all ULIPs issued on and after Feb 1, 2021, does not exceed Rs.2.5 lakhs

If the first condition is not met, the net gain earned on maturity of the policy would be taxed at your income tax slab rates.

On the other hand, if your aggregate ULIP premium exceeds Rs.2.5 lakhs, the tax liability would depend on the fund into which you invested. If you invested in equity oriented funds, the net gain from the ULIP would be exempted from tax up to Rs.1 lakh. If the gain exceeds Rs.1 lakh, only a marginal rate of tax of 10% would be payable on the profits earned.

If you had invested in a debt fund, the returns earned would be taxed at 20% but with indexation benefit.

In the case of pension ULIPs, you can claim a tax exemption on 60% of the fund value that you can withdraw on maturity. This exemption would be allowed under Section 10(10A) of the Income Tax Act, 1961 and give you a tax exempted income.

Also Read: Is pension taxable? All you need to know about Pension and its Taxability

Key Benefits of ULIP Plan

ULIP combines the best of both worlds, offering the protection of life insurance and wealth creation [TS1] potential of investments. Buying a tax saving ULIP plan is a smart move. Here’s why. 

Dual Advantage: Protection + Investment: While a term plan shields your future, Unit Linkedin Insurance plan goes a step ahead. ULIPs give you that edge by offering life cover along with the opportunity to invest in equity, debt, mutual funds, bonds, stocks or balanced funds. This makes them ideal for those looking to build long-term wealth while staying insured.

Tax Savings: Premiums paid towards ULIPs are eligible for tax deductions under Section 80C of the Income Tax Act (up to ₹1.5 lakh per year). In many cases, the maturity amount is also tax-exempt under Section 10(10D), making ULIP plan tax benefit a viable choice. However, there are certain conditions and you should go through the plan in detail to understand better. 

Fund Switching Flexibility: Choosing a tax saving ULIP lets you reap the benefits of market-linked returns. ULIPs even allow you to switch between fund types (equity, debt, or hybrid) depending on your market outlook or risk preference. You can switch between funds without any tax impact or additional charges. Make sure to access the market condition well and invest in funds which fit your needs. 

Goal-Based Investing: ULIPs help you invest in a disciplined, long-term way aligned with specific life goals. A part of your premium goes towards insurance coverage, whereas other part can be invested in market-linked funds. You can use those funds to plan for your child’s education, retirement or improve your financial stability.

Transparency and Control: With detailed policy statements, fund performance reports, and visibility into charges, ULIPs offer greater control and transparency compared to other plans. 

Partial Withdrawals: Certain plans offer partial withdrawals option, making it easier to withdraw money whenever you need. Again, there might be some conditions. Make sure to access the conditions and choose the right plan. 

Long-Term Wealth Creation: ULIPs offer tax benefits but there is a mandatory five-year lock-in period you’ll have to adhere to. This is a mandate by the Insurance Regulatory and Development Authority of India (IRDAI). encourages disciplined investing. However, this approach can help you build significant corpus over time, especially when started early.

Unit Linkedin Insurance Plan FAQs 

ULIPs, therefore, give accelerated tax benefits on ULIP Plan which help you reduce your tax liability and also create a tax-free corpus. Add to it the potential of market-linked returns, flexibility in managing your investments, professional fund management and life insurance coverage, and ULIPs become a complete package.

So, invest in ULIPs and understand how they can help you plan your taxes effectively.

Choose an insurer that offers a range of unit linked plans so that you can pick suitable plans that match with your financial goals.

Aviva Life Insurance offers a range of ULIPs that can cater to your financial needs. Explore the available plans and invest in them for your tax planning and financial planning goals.

Note: All the above mentioned Tax Benefits are as per the current Tax Laws. Tax Laws are subject to change.

AN Nov 24/21

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