How to Save Income Tax with ULIPs?

by Editor

How to Save Income Tax with ULIPs?

by Editor

by Editor

You’ll be surprised:

According to CRISIL’s Report, India has 3.9% life insurance penetration as against the global average life insurance penetration of 6.3%.

And that’s not all:

A report by IBEF reveals that the Indian life insurance industry grew from US$10 billion in FY2002 to US$54.58 billion in FY2016.

Here’s the BIG QUESTION:

“Why has life insurance suddenly become so popular?”

Investment experts and finance gurus believe it to be the after-effect of demonetization. You must have already noticed that most Indian banks have already started decreasing interest rates on fixed deposits. This is because banks, across the country, are teeming with funds after demonetization. Experts predict that Indian banking institutions will further reduce the rate of interest on fixed deposits.

In addition, the announcement of LTCG (Long Term Capital Gain) taxes, in Union Budget 2017, greatly impacted the credibility of mutual fund investments. Mutual funds, that once used to be the preferred investment instrument for a large majority of investors, have started losing their charm now.

Amidst all this, it’s really no rocket science to understand why life insurance products have become so popular amongst investors. But the one life insurance product that has stood out and emerged as a promising investment instrument for both short-term and long-term investors alike is Unit Linked Investment Plan.

Loaded with triple benefits of lucrative returns, comprehensive insurance and tax savings, Unit linked insurance plans, also popularly referred to as Ulips, have become the new go-to source for wealth creation over the long term.

Bur here’s the deal: tax planning has traditionally been the major objective for any investor buying a life insurance plan. And that’s why we are going to pull the curtains and reveal how to save tax with ULIPs.

So, without further ado, let’s get started!

Save Tax under Sections 80C

Like all other life insurance products, ULIPs also allow policy holders to save taxes on the premium paid against the policy under section 80C of the income tax act. The best part is that you can also include the extras such as GST, etc., paid as a part of your premium to the life insurance company.

According to the provisions of the Indian Income Tax Act, a tax exemption up to INR 1,50,000 is permitted under section 80C in a particular financial year. Here it is important to remember that the total annual premium must be lesser than 10% of the total sum assured under your ULIP plan.

In addition, as a rule of thumb, the ULIP plan must continue to remain active for 2 years to claim tax deductions under section 80C of Indian income tax act. If you choose to discontinue your ULIP plan in the 2nd year, the first year’s tax deductions are also withdrawn. Therefore, it makes sense to stay invested in a ULIP plan for a longer term.

Save Taxes on Withdrawals

Yet another way to save taxes with ULIPs is on withdrawals. ULIPs are known to offer amazing tax benefits on withdrawals.

You may choose to withdraw money from your ULIP policy in one of the three scenarios:

  • In the event of the policy holder’s death
  • In the event of the policy maturity
  • Partial withdrawals

ULIP plans offer completely tax-free death benefits to ensure that the nominees of the policy get the maximum benefit in the event of the unfortunate demise of the policyholder. In most cases, the payout for the death benefit is higher than the total sum assured due to the returns generated by the unit-linked investments.

In the event of the maturity of the policy, the policy holder is paid the assured maturity benefit or the total returns generated by the unit-linked investments, whichever of the two is higher. The maturity benefit offered by ULIP plans too is tax free under section 10(10D) of the Income Tax Act. On the contrary, the maturity benefits earned on mutual funds is fully taxable.

In addition, partial withdrawals are also allowed under ULIPs. These partial withdrawals are allowed after a pre-determined timeframe and are completely tax free. However, partial withdrawals can’t exceed 20% of the total fund value of the policy and can be made only after the completion of the lock-in period of the policy. Typically, the lock-in period for ULIP plans is 5 years.

Save Taxes with ULIP Top-Up Investments

In addition to the tax exemption on the ULIPs’ premium payment and the withdrawals, investors are also allowed to save taxes with top-up investments under ULIP plans. Investors can choose to invest excess cash through periodic top-ups under ULIP plans.

These top-ups are eligible for tax deduction under section 80C of the Indian Income Tax Act. Furthermore, these tops also qualify for tax deductions under Section 10 (10D) of the Income Tax Act provided the premium amount doesn’t exceed 10% of the total sum assured of the ULIP plan. In addition, the returns that you generate through top-up ULIP plans help you realize your future investment goals without having to worry about the potential tax liability.

Wrapping it Up!

Tax planning helps you reduce your tax liabilities and realize your investment goals, without having to run from pillar to post. Knowing how to save taxes with ULIPs can go a long way in ensuring tax relief under the different IT Acts and provisions. And this will help you enjoy your income, make maximum returns on your investments, without having to worry about the tax monster eating all your hard-earned money.

Now that you know how to save taxes with ULIPs, it’s time to put the learning into practice. Go ahead, invest in one of the many popular ULIP plans and see your wealth growing quickly and easily without giving away too much in taxes.

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