Life insurance has grown as a popular investment option for Indians in recent years. According to a report by the IRDA, the total number of active life insurance policies in India stood at about 328 million in 2017. Among the various types of life insurance, Unit Linked Insurance Plans (ULIP) have emerged as an effective wealth creation solution for investors over the long term. Apart from this, ULIP insurance is also a great tax saving tool.
Here are 4 reasons why a unit linked insurance policy is considered the best for tax benefits.
1. Tax Benefits on Premiums
In a ULIP investment, the premium paid is invested in debt, equity, or money market instruments. The premium paid on this policy is eligible for tax exemption under Section 80C of the Income Tax Act. Under this, you can save up to ₹1.5 lakhs on your taxable income for each financial year, based on the premium paid toward the ULIP. The only condition is that the amount of the premium should be smaller than 10% of the assured sum under the ULIP.
2. Tax Benefits on Maturity
Along with the tax benefits on premiums, you can also avail great tax savings on withdrawals and ULIP returns, which is not available to mutual fund investors. The withdrawals can occur in the following cases:
- Maturity of the policy
- Death of the policy holder
- Partial withdrawal on the discretion of the policy holder
The death benefits are completely tax free. In this aspect, a ULIP is just like a life insurance plan, offering security to the family of the insured. ULIPs also offer tax free maturity under Section 10(10D) of the Income Tax Act. This is where such plans differ from mutual funds. Income earned from mutual funds is completely taxable.
3. Goal Oriented Planning
There is a minimum lock in period of 5 years in case of ULIPs. After the completion of this period, the policy holder is permitted to make partial withdrawals. Such withdrawals are completely tax free. However, the withdrawals cannot exceed 20% of the value of the policy. This feature allows the policy holders to use ULIPs for goal-oriented investments, such as purchase of a house, children’s education, etc. The versatile investment options allow you to reduce the negative impact of inflation.
4. Top Up Your Investments
Periodic top ups are also permitted, which gives the opportunity to invest more in case you have some extra funds on hand. In case the premium paid for these top ups is not greater than 10% of the value of the policy, then tax benefits can also be leveraged by the policy holder under Sections 80C and Section 10D of the Income Tax Act. These top ups do not hamper your financial planning. Instead, they generate additional ULIP returns for handling your tax liabilities.
ULIPs are great for people looking not just for life cover, but also high returns and tax exemptions on their investments.