ULIPs not only provide protection and market linked returns, but also several tax benefits. In this article we take a look at the tax benefits offered by ULIPs.
Tax benefit on premiums paid: Premiums paid towards ULIPs are eligible for a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, there is a condition to avail this benefit. The premium amount should be less than 10 per cent of the sum assured. So if the sum assured is Rs 10 lakh, and the annual premium is Rs 80,000, it is eligible for deduction. In this case if the annual premium is Rs 1.10 lakh, tax exemption is allowed only up to Rs 1 lakh.
However, this applies only to ULIPs purchased after April 1, 2012. For ULIPs purchased before that, the deduction under Section 80C can be availed when the premium is less than 20 per cent of the sum assured. If the premium is more than 20 per cent of the sum assured, then tax deduction is allowed up to 20 per cent of the sum assured, subject to a limit of Rs 1.5 lakh.
If the policy holder surrenders the policy before 5 years, or within the lock-in period, the tax benefit is reversed. Hence it is important to hold the policy for at least 5 years to avail the tax benefit.
Tax benefit on maturity: The maturity plus the bonus amount, if any, is exempt from tax under section 10 (10D) of the Income Tax Act 1961. Here too the conditions are similar to those for availing tax deductions under Section 80C. For plans purchased after April 1, 2012, the annual premium should be less than 10 per cent of the sum assured for the entire term. For plans purchased before April 1, 2012, the annual premium should be less than 20 per cent of the sum assured for the entire term.
Taxation on capital gains: Union Budget 2018 introduced the Long Term Capital Gains (LTCG) tax under which LTCCG of over Rs 1 lakh in equity investments and equity mutual funds will be taxable at 10 per cent, without indexation benefits. ULIPs allow you to invest in equity funds, but the LTCG tax does not apply to ULIPs.
We have seen the various tax benefits that ULIPs offer. Not only are the premiums eligible for deduction under Section 80C thus reducing your tax outgo, the maturity proceeds from ULIPs are also tax free. Further, ULIPs are free from the Long Term Capital Gains Tax.
Tax benefits offered by ULIPs thus make it an attractive investment proposition. Coupled with other features like the option to invest in equity funds which offer market linked returns, free fund switches and a lock-in period of 5 years which inculcate a savings discipline in the investor, ULIPs are an appropriate investment tool to meet your goals.