ULIPs are unique insurance products that offer the benefits of life cover and investments. Therefore, these plans can provide financial protection to the policyholder’s family. ULIPs can also enable policyholders to meet their financial goals.
When a person invests in ULIP, a part of the premium goes towards life cover. The remaining amount is invested in different investment instruments like equity and debt funds.
Apart from the benefits of life cover and investments, ULIPs also provide tax benefits to the policyholders. Here are the tax benefits that policyholders can claim on ULIPs-
Tax Benefits on Premiums Paid
Under Section 80C, a policyholder can avail a tax benefit up to ₹1.5 Lakh on the premiums paid to purchase a ULIP plan. However, to avail the tax benefits, policyholders must ensure they stay invested until the end of the lock-in period of 5 years.
Tax Benefit In Case of Policyholder’s Death
If the policyholder passes away during the tenure of the plan, then his/her nominee can receive the sum assured and the returns generated by the ULIP. The death benefit is exempt from tax under Section 10 (10D).
Tax Benefit on Partial Withdrawals
A policyholder isn’t required to pay tax in case of partial withdrawal after the lock-in period of 5 years. However, the withdrawal amount shouldn’t be more than 20% of the fund amount.
Tax Benefit on Top-Up
Policyholders are allowed to purchase top-ups in order to increase their investment in a ULIP. These top-ups can also be claimed as a tax deduction.
Tax Rules on ULIPs
While ULIPs provide tax benefits, there are a few rules on how the tax will be levied on such plans-
Tax Rules on ULIP Returns
If the premium paid is more than ₹2.5 Lakhs, then tax will be levied on the returns.
Tax Rules as per the Funds Selected by the Policyholder
When policyholders pay premiums for ULIPs, they can choose to invest their money in different investment instruments like equity and debt funds. The tax will be levied based on the funds selected by the policyholder-
- If a ULIP has invested more than 65% funds in equities, then it’ll be taxed as an equity mutual fund.
- If an indirect equity investment is made, such as ETF, then it’ll be taxed as an equity mutual fund. However, the equity investment should be more than 90% to be taxed as an equity mutual fund.
Tax Rules on Maturity
- In case of ULIPs Purchased Before February 1 2021
The maturity amount is tax-free under Section 10(10D). However, in order to avail this benefit, the premium paid by the policyholder should be less than 10% of the sum assured.
- In case of ULIPs Purchased After February 1 2021
The returns will be taxed if the premiums paid by the policyholder are more than ₹2.5 Lakhs in a year.
If the amount of returns is more than ₹1 Lakh, then the tax will be charged at 10%. However, this tax is applicable on equity investments. In case of other investments, the tax will be charged at 20%.
Invest in ULIPs to Gain Tax Benefits
Unit-linked insurance plans (ULIPs) provide policyholders with the benefits of life cover and investments. Policyholders can also avail tax benefits by investing in ULIPs. Thus, by investing in ULIPs, people can get the financial protection and avail tax benefits.