Know Terms and Conditions to Save Tax with ULIPs
Unit-Linked Insurance Plans (ULIPs) offer the benefits of a life insurance policy and the opportunity to invest in different funds. When you purchase a ULIP insurance policy, it ensures that your loved ones will be financially secure in your absence. ULIPs also provide you with the chance to create substantial wealth by investing in equity, debt, or a combination of funds.
Apart from these offerings, ULIPs have many other plus points, allowing you to meet your long-term life goals and save money. One such advantage is tax-exemption. Here, we explain what tax benefits you can expect from ULIPs and how to claim them.
ULIP tax exemptions
Now that you understand what is ULIP policy, it is time to learn about the tax benefits that come with ULIPs under different sections of the Income Tax Act, 1961:
- Section 80C allows an exemption of up to INR 1.5 lakh on the yearly premium paid for your ULIP
- Section 10 (10D) permits completely tax-free maturity benefit. However, according to the recent Finance Bill, for all new policies purchased on or after Feb 1, 2021, if the annual premium amount is greater than INR 2.5 lakhs, the maturity amount will no longer be tax-exempt and will be treated as capital gains.
- Section 80C/80CCC/80CCD(1) all offer a tax deduction on the premium. However, remember that the overall exemption on the premium under the sections cannot be over INR 1.5 lakh
Terms and conditions to avail of ULIP tax exemptions
You need to keep specific terms and conditions in mind while claim tax benefits associated with ULIPs. Read on to know more:
- Maturity and partial withdrawal
You already know that the maturity benefit of the ULIP is tax-exempt. Additionally, ULIPs allow you to make tax-free partial withdrawals after the five-year lock-in period. However, you can get this benefit only if the premium is not over 10% of your ULIP’s sum assured.
If the premium surpasses 10% of the policy’s sum assured, you will have to pay tax on the returns from the ULIP. However, the policy’s death benefit is tax-free under any circumstances.
- ULIP retirement plan
If you purchase a ULIP retirement policy, you are eligible for a tax benefit. Section 10 (10A) of the Income Tax Act, 1961 offers you a tax exemption on the ULIP retirement policy’s commutation. However, if the ULIP pays you a pension or you surrender it, you will have to bear the taxation on the income received. Hence, consider this condition while requesting a tax exemption.
ULIP insurance comes with flexible investment choices, enabling you to maximize your returns. One of the features that makes it possible is the top-up facility. You can make periodic top-up payments as additional investments into the ULIP to build a larger fund in the long run.
Section 80C and Section 10 (10D) of the Income Tax Act, 1961 make the returns from top-ups tax-free. However, you will get the tax benefit only if the total premium paid is not more than 10% of the policy’s sum assured.
Top-ups help you increase the ULIP returns as per your changing financial goals. With top-ups, you can create more wealth and ensure that you have enough corpus to make your retired life more comfortable or provide your children with higher education. Now that you know the condition to avail of tax benefits on top-ups, it will be easier to save more, effectively increasing your returns.
Choosing the right ULIP
There are different types of ULIPs available in India. When purchasing a policy, it is necessary to compare the various options to find one that meets your and your family’s financial needs. The quickest way to compare ULIPs is by using an online calculator to determine which policy will benefit you the most in your budget. Once you find an ideal ULIP, you can buy it online from the insurance provider’s website.
With the suitable ULIP, you can effectively secure the monetary well-being of your loved ones as well as accomplish your life goals.