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.<\/p>\n\n\n\n
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<\/strong>[1]<\/strong><\/a><\/sup> to provide clarity about the concept.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n It enables investors to switch their portfolios between debt and equity on the basis<\/a> of their willingness to take risks as well as their market<\/a> performance knowledge. The flexible nature of the plan has immensely contributed towards its popularity among investors.<\/p>\n\n\n\n The different types of ULIPs can be better understood through the below-mentioned classifications.<\/p>\n\n\n\n The first classification is on the basis of types of funds, such as<\/p>\n\n\n\n Here the premium paid by the investor is invested in the equity market, subjecting it to a higher risk.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n As the name suggests, the premium is invested in a debt instrument that carries lower risks, therefore, offers lower returns.<\/p>\n\n\n\n Another classification is on the basis of the end use of the funds, which can be differentiated as under.<\/p>\n\n\n\n Investors opt for ULIPS when they want to invest for their retirement days during their employment to save for their retirement. <\/p>\n\n\n\n This plan allows the investor to invest towards a long-term goal of saving for their child’s education for some unforeseen circumstances.<\/p>\n\n\n\n The plan can help towards making investments for building a heavy corpus which can be utilized for a future financial goal.<\/p>\n\n\n\n Type I<\/strong>: <\/p>\n\n\n\n This plan pays higher of the assured sum value or the fund value to the nominee in case of the death of the policyholder.<\/p>\n\n\n\n Type II<\/strong>:<\/p>\n\n\n\n Here the policyholder\/ nominee gets the assured sum value plus the fund value to the nominee in case of the policyholder’s death.<\/p>\n\n\n\n The tax benefits of ULIPs are enumerated below –<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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<\/a><\/strong> and withdrawals free of taxes at maturity or partial withdrawals.<\/p>\n\n\n\nHow does ULIP Work?<\/h2>\n\n\n\n
What are the Types of ULIP? <\/h2>\n\n\n\n
On the Basis of Type of Fund<\/h3>\n\n\n\n
Equity Funds <\/h3>\n\n\n\n
Balanced Funds <\/h3>\n\n\n\n
Debt Funds <\/h3>\n\n\n\n
End Use of Fund <\/h3>\n\n\n\n
Retirement Planning<\/h3>\n\n\n\n
Child Education<\/h3>\n\n\n\n
Creation of Wealth <\/h3>\n\n\n\n
Death benefit to Policy Holders<\/h3>\n\n\n\n
What are the Tax Benefits of ULIP?<\/h2>\n\n\n\n
Tax Deduction u\/s 80C<\/h3>\n\n\n\n
Tax Benefits at Maturity<\/h3>\n\n\n\n
Tax-Free Partial Withdrawals <\/h3>\n\n\n\n
Top Up Deductions<\/h3>\n\n\n\n
Tax Benefits in Long-Term Investments<\/h3>\n\n\n\n
Numerous Advantages of a Single Plan<\/h3>\n\n\n\n
Conclusion<\/h2>\n\n\n\n