Though many policyholders opt for insurance plans to secure a life cover or to create wealth, ULIPs offer much more than that. Apart from the investment opportunity, you can avail tax perks on your insurance policy. Such tax-saving chances are available on the death benefit, ULIP premiums, maturity payout and more. Let’s understand the various aspects of a Unit-Linked Insurance Plan that enable you to save on taxes
Tax benefit on the ULIP premium
With a ULIP plan, you can enjoy the benefits of claiming the entire premium as a deduction under Section 80C of the Income Tax Act. A maximum cap of INR 1.5 Lakh is applicable on the amount you can claim per financial year. Therefore, you can easily save on the taxes on your ULIP insurance premium. As this insurance policy has a lock-in period of five years, you can avail the ULIP tax benefits at least for this period unless you surrender your policy before or after the lock-in.
Tax perks on the ULIP death benefit
In case of an untoward incident, the insurance provider shall pay out a death benefit under your ULIP policy. One of the biggest benefits of insurance plans is that the coverage sum is tax-free. You can claim the sum assured amount as a deduction under Section 10(10D) of the Income Tax Act, 1961. Hence, your loved ones won’t have to worry about paying taxes on the insurance payout. The entire sum can be utilised towards clearing pending debts and meeting the daily expenses of the family.
Tax benefits on the maturity payout
As the ULIP policy has an investment component, you can avail a maturity payout on completion of the policy term. This lump sum benefit can now be used to fulfil life goals and meet other requirements. But are there any taxes applicable on the maturity benefit paid out under ULIP? Previously, the maturity payout could be claimed as tax-free under Section 10(10D) of the Income Tax Act.
However, in Budget 2021, some changes have been made to the investment returns. Under the new tax proposal, you can enjoy exemption of tax on your maturity payout only if your annual premiums are lower than INR 2.5 Lakh. In case your ULIP premiums are more than the capped amount, the returns shall be taxed as capital gains. But this is applicable for newly bought ULIP plans only. Thus, as a new investor, you must bear in mind to keep your premiums under the capped limit to enjoy ULIP tax benefits. To understand how much returns you can earn on your investment, check out the ULIP plan calculator now!
Taxes on partial withdrawals
It could be an emergency or a financial urgency that might require you to make a partial withdrawal. Such a feature is available under ULIP policies after the completion of the lock-in period. These partial withdrawals made from the fund are tax-free and hence, you can stop worrying about it. However, the corpus withdrawn is equal to or less than 20% of the fund value. So, the next time you are in need of some funds, you can definitely depend on your ULIP policy without thinking about taxes.
Tax perks of the premium top-up facility
One of the most lucrative features of ULIPs is the premium top-up facility, which enables you to invest the surplus amount into your plan. This extra sum can go towards increasing your sum assured amount or into your investment fund for higher returns. So, what about taxes? You can claim the additional premium paid over and above the regular amount under Section 80C of the Income Tax Act. But the sum is capped at INR 1.5 Lakh including your annual ULIP premium. Thus, you can plan such contributions accordingly.
Now that you know the various tax benefits you can avail with ULIP, invest in such an insurance policy today! Though ULIPs enable you to save on taxes, you should avoid viewing it as just a tax saving instrument and make the most of your investment. Also, it is recommended to compare several insurance providers and the policies offered by them before selecting a suitable one.
