ULIP: Tax advantages of Unit Linked Insurance Plans

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September 18, 2020 1:30 PM

Traditional life insurance policies offer a reasonable return with bonus accruals along with the maturity amount. In comparison, ULIPs offer a return based on the market performance of the fund. Both are beneficial as long term investments in a horizon of 10 to 15 years.

ULIP, unit linked insurance policy, tax alert, income tax, Deductions under Chapter VI-A, tax-saving investments for FY2019-20, tax-saving investments, advance tax, complete these tax tasks today, TDS, TCS, July 31Traditional life insurance policies offer a reasonable return with bonus accruals along with the maturity amount. In comparison, ULIPs offer a return based on the market performance of the fund. Both are beneficial as long term investments in a horizon of 10 to 15 years.

ULIP or unit-linked insurance plan offers you life cover along with the opportunity of investment. A portion of the investment is towards insurance cover and the balance towards investment in a fund consisting of equity or debt or both. The investment serves a twin purpose of life cover and earning a return on investment. Investments in ULIPs have a lock-in period of five years.

The investments in ULIP are managed by fund managers and also offer the benefit of switching funds depending on the market conditions. In case the markets are volatile or returns are not stable, you can switch from one fund to the other options available under the ULIP. The switching is generally free up to a certain number of times and thereafter it is subject to the levy of a switching fee.

Traditional life insurance policies offer a reasonable return with bonus accruals along with the maturity amount. In comparison, ULIPs offer a return based on the market performance of the fund. Both are beneficial as long term investments in a horizon of 10 to 15 years. Let us have a look at the tax advantages of investing in a ULIP.

The investment or the premium payments made towards a ULIP are entitled to a tax deduction on a yearly basis. The premium paid qualifies for a deduction under section 80C as a tax-saving investment. You can claim a deduction for premium payments for a policy in your name, or in the name of your spouse or children. The deduction is within the overall limit of Rs 1.5 lakh per financial year.

Also, the switching of funds within a ULIP is not liable to tax. You can switch as per your needs and within the options available to maximize benefits under the policy.

The maturity proceeds of the ULIP are exempt from taxation subject to the below conditions:

– The premium paid should not exceed 10 per cent of the sum assured in case the policy issued after 1 April 2012.
– In the case of policies issued before 1 April 2012, the premium paid should not exceed 20 per cent of the sum assured.

The sum assured refers to the minimum amount that is assured to the survivor under the terms of the policy. The ULIP policy meeting the above conditions on insurance premium enjoys a complete tax-exemption on maturity. There is no separate taxation of the realized value of the units held in the fund similar to the capital gains tax on mutual funds. In the case of the death of the policyholder, there is a complete exemption on proceeds received without any conditions attached to premium payments.

The risk in ULIP depends on the type of fund it invests in:

– Equity funds: The risk is high for investments in the equity market securities.
– Balanced funds: In the case of balanced funds which invest in a mix of equity and debt, the risk gets spread over the investments and stands minimized.
– Debt funds: The risk is low in investments in the debt securities and returns are lower than equities.

ULIPs offer the tax benefits of deduction at the time of investment as well as exemption of the receipts upon maturity or death. While investing in a ULIP, one must choose the policy bearing in mind their risk appetite and the conditions under income tax law to claim a complete exemption upon maturity.

By, Archit Gupta, Founder, and CEO, ClearTax

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