How to save Tax with ULIPS
What do you choose when you want insurance coverage, market-linked returns, and tax benefits?
You choose 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 ULIPs give these benefits, they also help you save tax.
Yes, you read that right. ULIPs are tax-saving investment avenues that can go a long way in tax planning.
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 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 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.
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.
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.
Tax saving on maturity
Lastly, the maturity benefits received from a unit linked 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.
ULIP plans, therefore, give accelerated tax benefits 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.
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