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How to Claim Tax on Unit Linked Insurance Plan (ULIP)?

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Everyone likes the option of Buy 1 Get 1 option in a sale. Why pay for two separate products when you can avail them at the price of one? Financial planning includes so many financial products under one roof. Out of which, there is a product that provides the benefit of both investment as well as insurance opportunities. This investment instrument is ULIP, Unit Linked Insurance Plan.

ULIP has evolved as a popular investment instrument in India. Not only because of its best-of-both-world combo but also because of the Tax Saving benefits.

On that note, in this blog we’ll be focusing on the topics mentioned below:

  • What is ULIP?
  • Key Features of ULIP
  • What Tax Benefits does ULIP provide?

What is ULIP?

For wealth management, two pillars in your financial foundation are required: Investment & Insurance. Both these pillars are, therefore, present under ULIP. The goal behind this financial tool is that you can get the benefit of wealth creation along with life cover.

Therefore, Insurance companies put a portion of your investment into life insurance, and the rest amount in either equity or debt or both, whichever matches your long-term goals.

Financial planning offers ample financial goals, for instance, retirement planning, child education plans, or any other goal you wish to achieve.

The ultimate benefit of ULIP is that as an investor you can claim an 80C deduction. Let’s learn more about the tax benefits provided by ULIP!

What Tax Benefits does ULIP provide?

  • Tax Benefits on Premiums

Indian Income Tax Act, 1961 provides two important provisions that are applicable in the case of ULIPs:
* Section 80C (life insurance premium is tax-deductible)
* Section 80CCC (amount paid towards pension plans is tax-exempt).

Tax benefits up to Rs 1.5 lakh in a financial year are allowed by both Sections 80C and 80CCC. Therefore, the yearly premium, in this case, should be less than 10% of the sum assured.

Thus, if the chosen sum assured is Rs 15 lakh and the annual premium is less than Rs 1.5 lakh, the entire amount can be used to avail of Ulips tax benefit.

  • ULIP Tax Benefits for Maturity

As per Section 10 (10D) of the Income Tax Act, 1961, ULIP offers maturity amounts free of taxes. In order to avail of this claimed benefit, the premium should be less than 10% of the sum assured if the plan you bought is purchased after April 1, 2012.

The maturity amount will be tax-free for people who purchased the plan after April 1, 2012, but if the yearly premium is lower than the 20% of the sum assured.

  • Tax-free withdrawals in case of Death

In an unfortunate situation when the policyholder dies, then his family will be eligible to receive a sum assured. Not only this, but they will also receive the generated returns provided by the ULIP Plan.

This payout is ruled under the rules of the Income Tax Department. This was implemented as the death brings emotional instability within family members, at least now they won’t have to face financial instability too! The family will have financial support even after the breadwinner of the family is no more with them.

  • Tax-Free Partial Withdrawal

Another tax benefit that comes with ULIP is that if after the 5-year lock-in period you wish to from your ULIP plan, then you won’t have to pay taxes on that withdrawal too! But this is in reference to the amount withdrawn is less than or equal to 20% of the fund value.

Insurers may have certain limitations on the minimum amount or the number of partials withdraws made in a year, thus, it is recommended that you must go through the policy document of your ULIP Plan.

  • Protection from Long term Capital Gains (LTCG) Tax

Introduced in 2018 by the Union Budget, LTCG is applicable on profits earned from equity markets, equity mutual funds, or ELSS, if the profits exceed Rs. 1,00,000. A ULIP plan, however, continues to be exempt from the LTCG tax.

The best entitlement with ULIP plans is that since they provide the option of investing in equity markets, they continue to remain exempt from the burden of paying LTCG tax.