How to Save tax with ULIPs?

A Unit-linked Insurance Plan is unique as it offers dual benefits to the policyholder. The premiums that are payable for a ULIP are divided for insurance and investment purposes. The policyholder can decide on the type of investment he wishes to make with it.

A defined portion of the premium goes into securing life coverage for the insured individual. The remaining portion of the premium is used to invest in various debts and equity funds basis customer’s choice. Like all other life insurance policies, ULIP tax benefits are available for the policyholder to reduce their financial burden.

Most people consider ULIP a good investment option as it can bring higher returns to the policyholder. It can help meet significant life goals such as higher education of a child or retirement planning. The additional ULIP tax benefits help in managing tax liability.

It is essential to note that ULIP does not come without risks. Since a ULIP is a market-linked investment product, the performance of the market affects the fund performance. It is upto the investor to determine their risk appetite and then go forward with the purchase. Depending on the types of funds available for investment under the ULIP, the risk-factor may vary.

Any investment in life requires careful thinking as it involves your hard-earned money. Most people plan their finances to manage regular life expenses better and meet future needs. When purchasing a ULIP, it is advisable to appropriately calculate the adequate life cover to fulfil personal objectives.

While ULIP investment is valuable, it can have an impact on your income. There are certain ULIP tax benefits made available by the Government of India for the policyholders. When you invest your money towards a suitable plan, it is eligible for a ULIP tax deduction.

This follows from the provision that 'any sum paid to keep in force' a life insurance policy can be claimed as a deduction. The ULIP tax benefit can also include the extra components like service tax, etc., paid to the insurer.

Let's discuss some critical points about ULIP taxation in detail to understand better.

• The two key provisions of the Indian Income Tax Act that are applicable for ULIP tax benefit are the section 80C (life insurance premium is tax-deductible) and section 80CCC (amount paid towards pension plans is tax-exempt).
• According to these provisions, a ULIP tax benefit of up to Rs. 1,50,000 is allowed as per section 80C and section 80CCC in a financial year. It means that while you can certainly invest a higher amount, the total ULIP tax exemption is capped at Rs. 1,50,000* per annum.
• You should keep in mind that the yearly premium should be less than 10% of the sum assured. Hence, if the chosen sum assured is Rs. 15 lacs and the annual premium is less than Rs. 1.5 lacs, the entire amount can be used to avail ULIP tax benefit.
• However, if the annual premium is higher, say Rs. 3 lacs for the same sum assured of Rs. 15 lacs, the available ULIP tax benefit is still Rs. 1.5 lacs - i.e. (10% of Rs. 15 lacs).
• The plan must remain active for at least five years to claim the ULIP tax benefit. If you stop paying premium for the plan during the fifth year, ULIP tax benefits availed in the first four years will be withdrawn.
• Hence, ensure that you have a long-term investment horizon and continue to pay the premiums for the entire paying term to benefit from ULIP taxation.

Notably, the taxability of ULIP is subject to change in tax laws by the authorities. The ULIP tax benefit is subject to the prevailing regulations at the time of paying premiums.

Union Budget 2021 introduced a key amendment to Section 10(10D) of the Income Tax Act, 1961 which has led to a change in the way high value Unit-Linked Insurance Plans are taxed in India. As per the amendment, a high value ULIP is defined as one which has an annual premium greater than Rs. 2.5 lakh in a year. If such ULIPs have been issued after 1 February 2021, exemption provided to ULIP payouts under Section 10(10D) is not applicable. Additionally, the Budget announcement also included a special provision which is applicable to individuals who are paying premiums for multiple ULIPs. As per the updated rule, Section 10 (10D) benefit is also not applicable if the total annual premium paid by an individual holding multiple ULIP plans exceeds Rs. 2.5 lakh and the plans have been issued after February 1, 2023.

Following are some of the most common investment options available under ULIP plans:

You can use a ULIP to meet various financial obligations in life in several ways. The variety of investment options make it a desirable option. As an investor, it is in your best interest to review the taxability of ULIP, among other benefits. Here are some of them, discussed in detail to help you make an informed decision: