Radha had long understood that the best investment involved high tax exemptions. She had seen her mother ensuring tax exemptions by filling in forms for her fixed deposits and other investments. When she went to start her first investment and learned about Unit Linked Insurance Plans (ULIPs), naturally her first question was regarding the ULIP plan tax exemptions.
ULIPs offer significant tax exemptions for investors. The plans function as a combination of both insurance policies and investment instruments. The premiums invested into ULIPs have a part allocated to providing coverage, while another portion is invested into market instruments such as equity stocks or debt instruments. Read on to learn about the ULIP plan tax exemptions and deductions.
- Tax benefits on investment:
Money invested into ULIPs can be claimed as deductions under the Income Tax Act, 1961. These include deductions under Section 80C, which pertains to life insurance, or 80CCC pertaining to pension. Under both sections, a maximum of Rs. 1.5 lakh is allowed as deductions. Deduction under Section 80C are allowed up to 10% of the Sum Assured or annual premium, whichever is lower and subject to a ceiling of Rs. 1.5 lakh. While higher amounts can of course be invested, the deductions are limited to Rs. 1.5 lakh. - Two years’ lock-in period to avail tax benefits:
It is necessary to continue ULIP plans for a minimum of two years with regular premium payments, to avail tax benefits under Section 80C of the Income Tax Act, 1961. If the ULIP is discontinued before the lock-in period of two years, tax benefits under Section 80C will not be allowed.
- Tax benefit on partial withdrawal:
Under Section 10(10D) of the Income Tax Act, 1961, the amount received as partial withdrawal is free from tax if the premium payable does not exceed 10% of the sum assured. For the policies that were purchased before 1st April, 2012, the premium to sum assured ratio must not exceed 20% for proceeds to be exempt from taxes.
- Tax benefit of maturity of ULIP:
ULIP plan tax exemptions also include exemptions made under Section 10(10) of the Income Tax Act, 1961. Under this act, if the premium paid does not exceed 10% to the sum assured, the amount received on maturity of ULIP is exempt from taxes. For ULIP plans that were purchased before 1st April, 2012, the premium to sum assured must be 20% for the policyholders to be able to avail the tax benefits.
If the above mentioned ratios exceed the prescribed limit at any time during the policy tenure, the policy’s future proceeds will be taxable as ‘Income from Other Sources’ under income tax returns. This is taxable at the tax slabs that the policyholder falls into, and is applicable for all situations except in case of death.
- Tax benefits of retirement ULIP’s commutation:
ULIPs are great for meeting both short and long-term goals. While partial withdrawals allow for achievement of short-term goals, the long-term goals of ULIPs are realised over a longer tenure. Many people, thus, use ULIP plans as a retirement tool and build up the corpus until the time they retire. The returns to the investor at the time of the fund’s commutation are exempt from taxes under Section 10(10A) of the Income Tax Act, 1961.
- ULIPs exempt from LTCG taxes:
In the Union Budget 2018, long term capital gains (LTCG) tax was introduced on certain investment instruments. However, ULIPs continue to be exempt from the tax. ULIP plans are the only market-linked investment instrument that continue to be exempt from the LTCG tax, which has driven up costs for other forms of investments.
ULIP plan tax exemptions include deductions and exemptions across a broad range of taxations. It is important to understand these tax exemptions and deductions available on each and every investment instrument before deciding to go along with it. This is because different instruments may have different taxation liabilities, but ULIP plans offer the highest benefits in terms of taxation, thus making them an investment instrument of choice.
While tax exemptions are an integral part of the reason, the other advantages associated with ULIPs have also contributed to them emerging as the preferred choice of investment. ULIPs enable policyholders to ensure financial protection for their family and dependents after their passing away; while also aiding the creation of a substantial corpus. ULIPs can help investors meet both their short-term and long-term goals, and allow policyholders to easily switch between funds based on their individual risk appetite and requirements.