A unit-linked insurance plan also referred to as a ULIP, is a kind of life insurance.
ULIP is a market-linked plan that offers the opportunity for wealth creation along with insurance and superior ULIP tax benefits, in contrast to traditional life insurance tools like term insurance plans that only provide life insurance protection or high-risk investment avenues like mutual funds that do the same.
Moreover, ULIP is a life insurance product that is thought to be more dependable. With the advantages of ULIP taxation, safety & security, and returns combined in one insurance product, it is one of the best vehicles for long-term wealth growth. Additionally, it offers you the ability to invest while also providing life insurance as a bonus. But what makes the ULIP unique is that one of its main features is its tax benefits.
One of the many investor-friendly features that ULIPs provide is the option to invest a portion of the policy premium in a debt-equity mix, with the amount of investment being flexible. This makes it possible for the policyholder to swap funds within a ULIP without incurring additional ULIP tax obligations. This implies that you can allocate your funds to whatever you see fit to loans or stocks and then use the ULIPs switch option to change the investment amount. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
Tax advantages of ULIPs
1. Tax deductions are available for premiums paid for a ULIP
Section 80C of the Income Tax Act of 1961 allows for a tax deduction of up to 1,50,000 rupees for the premium paid for a ULIP. The premium must, however, be less than 10% of the plan’s sum insured in order for this deduction to be valid. The deduction amount is still capped at 10% for premiums above that percentage. So, the deduction amount will be capped at 1,50,000 if, for example, the premium you pay under a policy is 3,00,000 for a sum assured of 15,00,000. You should also be aware that because ULIP policies have a 5-year lock-in term, you will directly save money on taxes by taking advantage of its ULIP tax benefits. *All savings are provided by the insurer as per the IRDAI-approved insurance plan. Standard T&C apply.
2. ULIP provides tax advantages upon maturity
Being mature means finishing your insurance plan. When a ULIP matures, you receive the higher sum insured or the whole value of the unit-linked assets. According to Section 10(10D) of the Income Tax Act of 1961, this payment is tax-exempt. 10% of the value of the sum assured must be the maximum premium amount.
3. A ULIP enables tax-free partial withdrawals
After the ULIP’s required 5-year lock-in period has passed, you can make partial withdrawals tax-free. The withdrawal amount, however, is limited to 20% of the total sum insured value. This aids in tax avoidance and enables you to take out a portion of your savings for a variety of reasons, including retirement, property purchases, marriage, children’s education, etc. As a result, you are free to occasionally withdraw money.
4. A ULIP’s death benefit is not subject to taxation
A ULIP’s death benefit that is paid to your nominee or family members is not subject to taxes. The total sum assured and the earnings from market-linked investments made under the plan are both included in this benefit.
5. Tax deductions are available for any top-ups made under an active ULIP plan.
After the initial 5-year lock-in period, you can add more investments or cash to a ULIP. Sections 80C and 10(10) D of the Income Tax Act of 1961 provide tax deductions for these top-ups. However, the premium cannot be more than 10% of the amount insured.
6. Long-term tax advantages
The science and study of fleet management are transforming how traditional fleets are managed. The resulting confluence of networks, connected devices, and big data is increasing the influence of fleet management. You can use a ULIP calculator to estimate future returns and the value of a ULIP investment.
ULIP serves as the ideal link between straightforward life insurance protection solutions like pure-term plans and high-risk investments like mutual funds. High yields, life insurance, and the ULIP tax benefit are all provided. In addition, ULIP is a very adaptable modern insurance plan where you have complete control over your investments and money. You are free to make market investments based on your level of risk tolerance while also having insurance security. Also, as an investor, you should not overlook the tax advantages of ULIPs.
Currently, there are 2 tax regimes in India – new and old. To get the tax benefit you desire, choose the correct one after consulting an expert. You can opt for a regime change during the next financial year.