A ULIP is an investment product that offers you the dual benefits of life insurance and market linked wealth accumulation.
With just over two months left in the current financial year, it is that time when many of us sit back to determine our tax liability. It is time to check whether we have done enough to optimize our tax outgo and maximize our tax savings. More often than not, many people discover that there is still some room left to make those last minute investments in order to reduce their tax outgo. The reason that tax optimization is the smart thing to do is that it not only saves you some money in the present in the way of tax savings, it can also help you build wealth for your future financial goals if you choose the right investment instrument.
When it comes to tax-saving investments, there are different options to choose from. But, there are some investments that are smarter than others. In this article, we explore why buying a Unit Linked Insurance Plan (ULIPs) is one of the preferred options, especially from the perspective of tax planning as a sub-set of financial planning.
A ULIP is an investment product that offers you the dual benefits of life insurance and market linked wealth accumulation. Moreover, since these plans have the option to invest in both equity and debt markets, they have the potential to deliver better returns than other tax-saving products.
Let's take a look at some of the amazing tax-benefits of ULIPs in detail.
1. Tax benefit on premium
The single biggest benefit of investing in a ULIP policy is that the entire premium that you pay can be deducted from your taxable income, up to a limit of Rs 1.5 lakh, under section 80C of the Income Tax Act, 1961, subject to provisions stated therein. Life cover should be at least 10 times of annual premium paid.
2. Tax benefits on maturity
You invested in the ULIP and saved some tax at the time of making that investment. But, what happens when you liquidate your investment after it has matured? Do you pay tax on the whole maturity payout or just the profit that you earned? The good news is that if all due premiums are paid then, you do not pay any tax at the time of maturity either for policies issued prior to 1 February 2021, as ULIPs offer tax-free maturity amount as per Section 10 (10D) of the Income Tax Act 1961, subject to provisions stated therein . For policies issued after 1 February 2021, in case the aggregate premium in a financial year exceeds Rs.2.5 lakhs, the maturity proceeds from such policy would be taxed as capital asset basis the recent Finance Bill. However, the tax exemption under Section 10(10D) would continue for policies with annual premium less than Rs.2.5 lakhs in aggregate subject to provisions stated therein.
3. Tax-free partial withdrawals
If you wish to withdraw money from your ULIP plan after the five-year lock-in period, you don't have to pay any taxes on that withdrawal too, provided the amount withdrawn is less than or equal to 20 per cent of the fund value.
4. Tax-free payout in the event of death
In the unfortunate event of death of the policyholder, the deceased's nominees receives the entire sum assured, or the total value of the fund in which the policyholder had invested, whichever is higher, as per the policy terms and conditions. As the family deals with the loss of the loved one, at least they do not need to worry about their life goals getting hampered as the lump sum payment or payment in installment also. Moreover, the entire payout in the event of the death of the policyholder is also exempt from any taxation except for a Keyman Policy.
5. Deductions on top-ups
Another feature of ULIP plans is the flexibility they offer. For instance, ULIP allows investors to increase their investment by buying periodic top-ups. This way, whenever you have some extra income -- or you need to make last minute investments to minimize your tax outgo - you can use that money to buy more units as part of your ULIP investment. These top-ups are also eligible for income tax deductions under sections 80C of the Income Tax Act, 1961, subject to provisions stated therein.
6. Protection from Long Term Capital Gains (LTCG) tax
The LTCG tax was introduced in the Union Budget 2018 and is applicable on profits earned from equity markets, be it shares, equity mutual funds or Equity Linked Saving Schemes (ELSS), if the profits exceed Rs 1,00,000. A ULIP plan, however, continues to be exempt from the LTCG tax. And since ULIP plans also offer the option of investing in equity markets, they continue to remain exempt from the burden of paying LTCG tax.
So if you are looking for the investment vehicle to save some money this tax season, you may consider ULIP. You could choose from the various ULIP plans offered by Bajaj Allianz Life Insurance, one of the leading private life insurance companies in India. Not only can you buy their plans from their extensive offline network of 511 branches and over 80,000+ agents (as on 31 Dec 2020), you can also buy Bajaj Allianz Life ULIP plans online from the comfort of your home by logging on to their website. The company offers different ULIP plans that you can choose from according to your financial objectives. Moreover, Bajaj Allianz Life has a claim settlement ratio of over 98.02 per cent in FY2019-20, you could be assured that not only your investment needs, but also your insurance needs would be served efficiently.
Due to the multi-dimensional benefits that ULIPs offer, you may consider adding them to your investment portfolio to strike a balance between your insurance and investment needs. The added tax benefits on investment as well as maturity are just the cherry on the top.