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A ULIPs (Unit-Linked Insurance Plans) is a type of scheme that offers a combination of life insurance and investment. Part of the premium paid goes towards the life insurance aspect while the other part is invested just like a mutual fund.Where a separate life insurance policy and mutual fund investment is bound to cost you more, a ULIP combines these two common tools into a neat little package that has way lesser premiums. The added tax benefit is the cherry on the cake.Let us understand how modern ULIPs have become efficient at saving tax.
Tax benefits on premiums paid
According to Section 80C of the Income Tax Act, 1961 , premiums paid for Unit Linked Insurance Plans are eligible to be deducted from taxable income upto Rs. 1,50,000 in a year. This means that if your annual premium for ULIPs adds up to Rs. 1.5 lakh or less, then that amount can be deducted from the total income that is calculated for tax purposes.Thus, your income tax will be calculated on the new, reduced total income which will lead to a substantial reduction in the amount of tax you pay. The only condition to this rule is that the premium must be less than 10% of the sum assured in the policy.
Tax benefits on maturity amount
Once your ULIP reaches its maturity date, you can claim the maturity amount. The great thing about a ULIP is that even the maturity amount is completely tax free according to Section 10(10D) of the Income Tax Act. Here, too, the only condition is that the premium must be less than 10% of the sum assured in the policy. This is for policies purchase after the 1st of April, 2012. For policies purchased before the mentioned date, the premium amount must be less than 20% of the sum assured.
No Long Term Capital Gains Tax (LTCGT)
Yet another feature that makes ULIPs so attractive is that they are the only market-linked investment tools to be excluded from Long Term Capital Gains . Returns on regular mutual funds are taxed under LTCGT at 10 percent on gains of over 1 lakh in a year, while ULIPs are totally exempted from Long Term Gains Tax. Since ULIPs also have an investment aspect, they are preferred by some over mutual funds for this very reason.
Conclusion
Thus, it is very much evident that ULIPs can have a three pronged effect on one’s financial planning. First, it provides a life cover so that your family’s future is taken care of in case you pass away. Second, it offers an opportunity to create wealth via its investment benefit.And third, it is highly efficient at saving tax due to its unique placement in the market. So rather than keeping investment and tax saving as isolated goals, one must find ways to keep them aligned with each other, which ULIPs can do spectacularly.Ready to make the most of your money? Start your tax planning journey now!
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
