IRDA

Top Tax Benefits of ULIP

A Unit Linked Insurance Plan, also known as ULIP, refers to a life insurance policy offering the security of insurance and the potential of investment returns wherein the units are allocated depending upon the proportion of investment in the fund. Investors most commonly use the plan for claiming deduction under 80C of the IT Act 1961.

The investors must be aware of 2 major pillars of wealth management, i.e. insurance and investing in equities and both pillars can be incorporated through such a plan wherein a small portion of the money is invested in securing the life of the investor, and the rest is invested in equities for fulfilling the long term goals of the investor. The present article discusses the Tax Benefits of ULIP^[1] to provide clarity about the concept.

How does ULIP Work?

When an investor makes an investment, a part of it is invested in shares/bonds by the insurance companies and the rest of the amount is utilized for providing insurance coverage. Such investments are managed by the fund managers of the company, thereby relieving the investors from the hassles associated with tacking the investments.

It enables investors to switch their portfolios between debt and equity on the basis of their willingness to take risks as well as their market performance knowledge. The flexible nature of the plan has immensely contributed towards its popularity among investors.

What are the Types of ULIP?      

The different types of ULIPs can be better understood through the below-mentioned classifications.

On the Basis of Type of Fund

The first classification is on the basis of types of funds, such as

Equity Funds 

Here the premium paid by the investor is invested in the equity market, subjecting it to a higher risk.

Balanced Funds 

In the case of balanced funds, the funds are invested in a balanced manner between the equity and debt market to minimise the risk to the investors.

Debt Funds 

As the name suggests, the premium is invested in a debt instrument that carries lower risks, therefore, offers lower returns.

End Use of Fund  

Another classification is on the basis of the end use of the funds, which can be differentiated as under.

Retirement Planning

Investors opt for ULIPS when they want to invest for their retirement days during their employment to save for their retirement.  

Child Education

This plan allows the investor to invest towards a long-term goal of saving for their child’s education for some unforeseen circumstances.

Creation of Wealth 

The plan can help towards making investments for building a heavy corpus which can be utilized for a future financial goal.

Death benefit to Policy Holders

Type I: 

This plan pays higher of the assured sum value or the fund value to the nominee in case of the death of the policyholder.

Type II:

Here the policyholder/ nominee gets the assured sum value plus the fund value to the nominee in case of the policyholder’s death.

What are the Tax Benefits of ULIP?

The tax benefits of ULIPs are enumerated below –

Tax Deduction u/s 80C

The premium paid for ULIP is eligible; for tax deduction u/s 80C of the IT Act 1961, provided that the premium is less than 10 % of the sum assured plan. Along with this, it is worth noting that the lock-in period of such policies is 5 yrs which straightaway enables tax savings through the plan’s tax exemption benefits.

Tax Benefits at Maturity

It enables the investor to avail the sum assured or the entire value of the unit-linked investments (whichever is higher) at maturity. Such payout is exempted under Section 10(10D) of the Income Tax Act, 1961. The premium amount must be limited to 10% of the assured value.  

Tax-Free Partial Withdrawals  

The investor can make tax-free partial withdrawals under this plan upon the completion of the 5 yrs lock- in period wherein the withdrawal amount isn’t exceeding 20% of the total sum assured value helping the investor in avoiding tax together with withdrawing for different financial needs, such as marriage, a child’s education, retirement, home purchase, etc. thereby providing the freedom to withdraw funds from time to time.

Top Up Deductions

The plan provides the opportunity to the investor for increasing their investment through purchasing top-ups and also availing the tax deduction benefits u/s 10D and 80C of the ITA 1961.

Tax Benefits in Long-Term Investments

The Investor can enjoy the tax benefits of this type of plan for a long-term investment as the lock-in period is of around five years, and the plan can provide profit for at least 5 consecutive years by saving tax on the premiums along with gaining more tax benefits toward the plan if the policy continues. 

Numerous Advantages of a Single Plan

Unit-linked insurance plans are quite beneficial compared to traditional insurance plans, PPFs, and mutual funds. Life insurance provides life cover but doesn’t facilitate wealth creation; similarly, mutual funds offer good returns but no insurance coverage. Therefore, these plans create a bridge and provide the additional benefit of tax saving.  

Conclusion

ULIPs provide an opportunity for achieving wealth creation goals. The plans are flexible, providing the choice of different fund options, enabling the taxpayer to switch funds as per their investment objectives or market activities and tax savings and withdrawals free of taxes at maturity or partial withdrawals.

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