Learn the Tax Benefits Offered by ULIPs


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Whether it is buying a life insurance policy or investing their hard-earned money in financial instruments, people are always looking for options with multiple benefits. This is why products like Unit-Linked Insurance Plans (ULIPs) have immense popularity. Apart from the life cover and wealth creation, ULIPs offer another significant advantage, tax exemption.


What is ULIP?


ULIP combines two distinct benefits, which include life insurance cover and investment. You can purchase ULIPs by paying a regular premium.


The life insurance cover protects your loved ones’ future by providing financial aid when they need it the most. The investment option of ULIPs allows you to grow your idle money and create a substantial fortune. You can use a ULIP calculator to estimate the future value of your investment. Apart from these, ULIPs come with tax benefits. Here, we explain what kind of tax-exemptions you can expect.


Tax deductions in ULIPs


What sets ULIPs apart from most other life insurance policies is the dual offerings of insurance and investment along with tax exemptions. As already mentioned, you have to pay regular premiums to keep the policy active during its tenure. The premium is tax-exempt up to INR 1.5 lakh per year under Section 80C of the Income Tax Act, 1961.


Additionally, the death benefit in ULIPs is tax-exempt, ensuring your nominees can use the entire amount.


Another tax benefit ULIPs provide is the exemption under Section 10 (10D) of the Income Tax Act, 1961, which enables you to receive a tax-free maturity value. If you make any profit by switching between debt and equity funds of your ULIP, that amount is tax-free, too. You do not have to pay any taxes for switching funds either, which allows you to maximize your profits from the investment.


However, the maturity benefit is tax-free only under some conditions. Read on to learn more.


Conditions for tax-exempted ULIP maturity benefit


Before understanding the norms, you have first to learn what is the sum assured of ULIPs. It is the minimum maturity benefit amount the insurance provider offers to the policyholder. Now, let us look at the conditions for a tax-free maturity amount:


  • If you bought the life insurance plan after April 1, 2012, the premium paid must not be more than 10% of the policy’s sum assured


  • If you invested in the life insurance policy before April 1, 2012, the premium paid must not be over 20% of the plan’s sum assured


  • For policies issued after 1 February 2021, in case the aggregate premium in a financial year exceeds Rs.2.5 lakhs, the maturity proceeds from such policy would be taxed as capital asset basis the recent Finance Bill. However, the tax exemption under Section 10(10D) would continue for policies with annual premium less than Rs.2.5 lakhs in aggregate subject to provisions stated therein.


While filing your income tax returns, be sure to proceed accordingly.


Other plus points of ULIPs


  1. Flexibility


Purchasing top-performing ULIP funds enables you to build wealth. It is possible because ULIPs let you move your investment between debt and equity funds as per the market conditions. Also, you can choose the sum assured and buy riders along with the existing policy.


  1. Emergency withdrawal


ULIPs have a five-year lock-in period. After that, the insurance companies permit you to withdraw a portion of your funds. This can be helpful during financial emergencies.


  1. Transparency


You have the right to ask your insurer about the policy’s possible returns, charges, and premium usage. It ensures that you always have clarity about the plan. You can also find information about all the features and benefits of the ULIPs from the policy document. Additionally, ULIPs come with a free-look period during which you can return the policy in case of dissatisfaction.


With so many advantages, ULIPs can provide you with monetary security. Before buying any policy, use a ULIP calculator to understand the premium you will need to pay for a particular sum assured.






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