There are several reasons why a unit-linked insurance plan (ULIP) can be a great investment option. ULIPs can effectively meet the needs of those who want to get life insurance and grow their money over time. Let’s learn more about the taxation of ULIP plans and their other aspects.
Overview of ULIPs
A Unit-linked Insurance Plan may be considered to bequite beneficial as it provides the policyholder with two major benefits. When you pay premiums for a ULIP, a part of the money goes towards insurance and the rest towards investments.The policyholder may be able to decides what kinds of investments they wish to make.
A specific premium amount is used to purchase life insurance for the insured person. The remaining half of the premium is invested, at the customer’s discretion, in various debt and equity funds. Since a ULIP is a life insurance policy, it may provide a host of tax benefits to the policyholder and reduce their tax outgo.
Due to its potential to offer policyholders larger returns, most individuals think ULIPs are a suitable investment choice. Significant life goals like a child’s higher education or retirement preparation can be achieved with its assistance. Managing tax obligations is made easier by the increased ULIP tax benefits.
It is critical to remember that ULIP has dangers. Since ULIPs are linked to the market, the performance of the funds depends on market conditions. Investors should assess their risk tolerance and choose appropriate funds accordingly.
The ULIP calculator can be usedto estimate the returns you might get at maturity by entering some basic information.
- Tax Advantages of ULIPs
When you make a financial purchase that requires spending your hard-earned money, you should exercise careful consideration. After all, financial planning is supposed to help you fund your future financial needs while allowing you better control over present finances as well. Hence, it is advised to evaluate and understand the various aspects of present and future finances before purchasing a ULIP.
While investing in a ULIP can be beneficial, it can also impact your earning potential.The Government of India offers its citizens who own ULIPs a number of tax advantages. If you invest in a qualifying plan and meet the terms and conditions, you may enjoy tax deductions under a ULIP.
To better understand, let’s go over a few important points about ULIP taxation in depth.
- Section 80C (life insurance premiums are tax deductible) and Section 80CCC of the Income Tax Act of 1961(the amount paid towards pension plans is tax-exempt)are the two main sections that may help you to claim ULIP tax benefits.
- As per theseSections, an ULIP tax benefit of up to Rs. 1,50,000 is permitted under the prevalent tax laws. This means that even if you have more money to invest, the tax exemption for ULIPs is limited to Rs. 1,50,000* per year.
- It’s important to keep in mind that the annual premium for a ULIP should not exceed 10% of the sum assured. For example, if you have chosen a sum assured of Rs. 15 lakhs, you may be eligible for ULIP tax benefits if the yearly premium is below Rs. 1.5 lakhs.
- ULIP tax benefits are limited to Rs. 1.5 lacs, even if the yearly premium is greater, say Rs. 1.8 lacs for the sum assured value of Rs. 20 lacs.
- To be eligible for the ULIP tax benefit, the premium must be paid on time and the lock-in period of five years must be respected. If you continue paying premiums for your ULIP beyond the first four years, the tax benefits you received earlier will be nullified in the fifth year. **
The following list includes some of the popular investment choices offered by ULIP plans:
- Equity Funds
These ULIPs are the ones that are frequently linked to high risk. You can invest in high-risk company stocks and equities through this ULIP. It is well renowned for offering the best gains despite carrying a higher level of risk.
- Bond Funds and Income, Fixed-Interest Funds
Those who are comfortable with medium-risk investing options might consider these ULIPs. You have a variety of investment possibilities, including corporate bonds, fixed-income instruments, and government securities.
- Money in Cash
With this ULIP, clients can invest in lower-risk financial products such as market money funds, cash, bank deposits, and others. The investor receives lower returns due to the lower risk profile.
- Balancing the Funds
As the name implies, you can maintain a balanced investment portfolio with this ULIP. As a result of the money being invested proportionately in various types of funds, they are relatively stable. The amount of money to be invested can be split between lower-risk fixed-interest instruments, higher-risk company stocks, and high-risk equity investments.