How to Save Taxes with a ULIP Policy?

Besides, ULIP has gained immense popularity among life insurance buyers because it offers them market-linked returns and tax benefits.

Working of ULIP

When you buy a ULIP policy, the insurance company uses a part of the premium to invest in different investment instruments like shares, bonds, mutual funds, etc., and the remaining amount to offer insurance protection. Although you can define the percentage of the funds that you want to invest in different asset classes, you need not make any active investment decisions or keep track of the market movements.

Professional fund managers manage the investment and work to generate valuable returns for you. ULIPs also allow you to switch your investment from one fund to another based on your risk-taking capacity, changing market conditions, etc.

Tax benefits of ULIPs

Many investment experts have corroborated that ULIP is a great tax-saving investment. The tax-saving feature of ULIPs attracts many modern investors towards it. It is a tax-saving instrument with EEE (exempt, exempt, exempt) tax status.

It offers you tax benefits on premiums paid, returns gained, and maturity proceeds. Besides, it assures additional tax benefits on premium top-ups, fund switches, etc.

1. Tax benefit on premium

The premium you pay for ULIP is eligible for tax benefit under Section 80C. You can claim a tax deduction of up to ₹1.5 Lakh in a financial year. However, you must know that you can claim this deduction only if your premium is less than 10% of the policy's sum assured.

2. Tax benefit on policy maturity

Policy maturity implies the end of the policy tenure. At the end of the ULIP term, you get the sum assured or the full value of the ULIP investment, whichever is higher. This amount is fully tax-free under Section 10(10D) of the IT Act.

3. Tax benefit on partial withdrawals

ULIPs have a lock-in period of five years. However, you can make a partial withdrawal after completing five years, and this amount is completely tax-exempt. However, you must note that the amount you withdraw cannot be more than 20% of the total sum assured value.

You can use the amount from the ULIP for an emergency or significant expenses like your child's education, home purchase, marriage, etc.

4. Tax benefit on death benefit paid to the family members

In the event of your unfortunate demise during the policy period, the insurer will pay the death benefit, i.e., the sum assured of the policy and the accrued returns generated from your investment in different assets. The entire amount is tax-free in the hands of the nominee.

5. Tax benefit on top-ups

If you have purchased a ULIP policy, then you can make top-up investments after the five-year lock-in period, which are eligible for tax deduction under different sections of the IT Act. However, the premium for the top-ups must not be more than 10% of the sum assured to enjoy the tax benefit.

6. Tax benefits on ULIP returns

Typically, when you invest in a market-linked scheme, you are obliged to pay STCG (Short-term Capital Gains) or LTCG (Long-term Capital Gains) tax on the returns earned if the amount exceeds ₹1 Lakh. However, the returns you may earn from investments in ULIP are fully tax-free.

Final Word

Thus, ULIPs help you enjoy significant tax benefits in the long run while securing your family's financial future and allowing you to build wealth.