A Unit Linked Insurance Plan or a ULIP, as it is popularly known, is a financial product that beautifully combines insurance and investmenton a single platform. You get a life insurance policy and along with it an investment plan as well. So while your life stays covered, your wealth multiplies simultaneously. This is a major benefit of buying a ULIP. However, a ULIP also helps you to save tax and that is a good reason for you to consider getting one.
Tax Implication of ULIP
You can save tax in primarily three ways when you invest your money in a ULIP. Let us take a detailed look at the three-fold ULIP tax-saving mechanism:
- Section 80C: Since a ULIP also includes a life insurance plan in it, you get the same tax benefits applicable to every other type of life insurance. Under Section 80C of the Indian Income Tax Act, the premium you pay towards your life insurance plan is tax deductable. The amount you pay for the premium of your ULIP is deducted from your taxable income and your tax bracket reduces. You can get a maximum deduction of INR 1.5 lakhs in a single financial year. This is a straightforward and effective way to save tax with ULIPs.
- Section 10(10D): Next, we have Section 10(10D) of the Indian Income Tax Act, 1961. As per the specifications of this section, the maturity benefit from any life insurance plan is tax free, provided the sum assured is at least 10 times the premium paid every year. If, however, the sum assured is less than that, your maturity benefit would become taxable.
However, after the new ULIP investment regulation, 2013, a minimum amount of 10 times the sum assured is mandatory for investors less than 45 years of age. However, if you are more than 45 years of age, it makes sense to opt for sum assured which is at least 10 times of the premium so as to avail tax free maturity benefit. However, if you opt to pay top-up premiums, the ratio might get changed. However, if the 1:10 ratio for premium:sum assured is maintained all the years, then the maturity benefit is surely tax free U/S 10(10D), which is usually the case for most.
- No tax penalty for fund switches: The ULIP is the only kind of investment tool in India where you can switch between the investment funds without getting any tax implications. This allows you to aim for a higher tax benefit.
For example, you started the investment with a cash fund, but decided to switch over to an equity fund to get higher returns and your wealth grows. However, in this particular switch, there is no capital gains taxation whatsoever. Whether the switch happened within 1 year or 3 years, it hardly matters as there is no long-term or short-term capital gains taxation that is implied on any of the fund switches within a ULIP, unlike any other investment product in the industry.
This is a major advantage of investing in a ULIP and a very handy way to plan your tax benefits.
These are the three extremely effective ways in which you can save money on your tax payments when investing in a unit linked insurance plan. Keep them in mind before you buy your next unit linked insurance plan.
Is ULIP the Best for Tax Benefits?
While a ULIP definitely offers some wonderful tax benefits, it is for you to decide whether or not it is the best tax saving tool. Everyone has different requirements and you should take a look at the bigger picture before you invest your money. A unit linked insurance plan, or any other financial product for that matter, is not to be chosen based on just one advantage. So assess the overall gains you receive from a ULIP. Check for the life cover, the investment patterns, the yields and definitely the tax benefits too. If you find favourable returns in every aspect, a ULIP would surely bethe best instrument for tax benefits. If not, you may have to extend your investment portfolio to accommodate the best and the most effective yields for yourself.
In conclusion, it can safely be said that a unit linked insurance plan is indeed a very good tax saving instrument. Thankfully, there are some excellent ULIPs available in India these days. Explore your options and buy a ULIP that suits your requirements. Run an online comparison to quickly locate the most suitable ULIP for yourself. Once that is done, start investing. You will save taxes in installments (as and when you pay the premiums) and also in bulk (when you receive the sum assured). So plan out your finances wisely and derive the benefits from the very useful unit linked insurance plans.