A life insurance plan that enables you to save on taxes as well. Yes, you read that right! Read on to know more.
Unlike mutual funds, this investment plan helps you avail tax benefits on Maturity Benefit after the completion of the policy tenure. What’s more, you also get to save on Long Term Capital Gains (LTCG). Wondering what insurance plan this is? The answer is Unit Linked Insurance Plan. In case you haven’t heard of Unit Linked Insurance Plans before or are eager to know more about the tax benefits that you are eligible for, this article is especially for you.
So, here we go…
ULIP at a glance
Before we get to the provisions for tax deductions on one of the most effective investment plan, let’s take a quick look at the basics of such a plan.
Unit Linked Insurance Plan serves the dual purpose of being an insurance-cum-investment instrument. It offers a comprehensive life cover along with capital growth against investments. The objective of such investment plans is to invest a certain portion of the premium amount towards life insurance. The remaining balance is invested in capital market instruments like equity or debt or a mix of both, as per your unique financial goal.
Your financial plans may be as varied as preparing for your child’s higher education and marriage, your own retirement plans, or any long term aspirations that you may have. Investments towards a Unit Linked Insurance Plan make you eligible for tax deductions on your annual premium payment(s) for the financial year as well as on benefits paid out from the plan.
You can avail tax benefits on Maturity Benefit on completion of the maturity term, a stark difference from regular mutual fund investments. This Maturity Benefit refers to the current market value of the unit linked investments. Not just that, Death Benefit on the policyholder’s demise is also completely tax free which is the market value on the date of intimation of death of the life insured or Sum Assured, whichever is higher. What’s more, there are also tax benefits on partial withdrawal. Phew!
All you need to do to become eligible for these benefits is pay a pre-determined premium amount within the stipulated due dates throughout the policy tenure. Sounds like a plan, doesn’t it?
Now that we’ve discussed the objective of Unit Linked Investment Plans in short, let’s move on to the crux of the matter – the tax deductions applicable on investments towards these investment plans.
Tax Deductions on ULIP
Tax deductions for Unit Linked Insurance Plans offer dual benefits - one, during investments, and second, at the time of maturity of the insurance plan or retirement benefits.
Section 80C of the Income Tax Act, 1961
The premium invested towards Unit Linked Insurance Plans for the purpose of a life insurance cover is applicable for tax deductions under Section 80C. Under Section 80C of the Income Tax Act, 1961, individuals as well as Hindu Undivided Families can avail tax deductions of up to Rs.1.5 lakh on annual premium payment(s). For instance, in case Mr. Sharma has investes Rs.1.5 lakh, he would be eligible for tax deductions on the entire amount of Rs.1.5 lakh in the same year. In another instance, Ms. Arora who has invested Rs.2 crore will also be eligible for a tax deduction, but for Rs.1.5 lakh only. This is because Section 80C of the Income Tax Act, 1961, offers a maximum tax deduction of Rs.1.5 lakh annually.
Tax saving benefits against premiums for ULIP Riders related to health benefits is also applicable under Section 80D of the Income Tax Act, 1961. In case you decide to discontinue investing in your ULIP before 2 years, you will not be eligible for tax benefits offered under Section 80C of the Income Tax Act, 1961. The deduction that you have availed in the previous financial years will be added to your income in the year in which you have closed your ULIP plan.
Sub-section 80CCC of Section 80C
The capital invested towards Unit Linked Insurance Plans for the purpose of a retirement scheme is applicable for tax deductions under this sub-section. Tax benefit for such investment plans under sub-section 80CCC is applicable up to Rs.1.5 lakh. This is applicable to individual taxpayers only.
Tax Deductions under Section 10(10D) of the Income Tax Act, 1961
For a life insurance ULIP policy, tax deductions under Section 10(10D) of the Income Tax Act, 1961 are applicable on premium amounts up to 10% of the pre-determined sum assured. In such cases, the Maturity Benefit or the amount received on partial withdrawal is tax free. However, for life insurance policies that have been purchased before 1st April, 2012, tax deductions can be enjoyed on premium payments up to 20% of the sum assured. Any premium amount over and above this ratio is taxable, as per the tax slab applicable to you under the income from other sources of the Income Tax Act, 1961.
Let’s take an example to understand tax benefits under Section 10(10D) better. Mr. Das has taken a ULIP plan for which he pays Rs. 1 Lakh as annual premium which has a sum assured of Rs. 10 Lakhs. Now suppose, 15 years down the line, if his ULIP plan on maturity provides him a maturity value of Rs. 45 Lakhs, the entire maturity of Rs. 45 lakhs will be tax free in his hands as the premium paid by him does not exceed 10% of the sum assured.
Unit Linked Insurance Plans that are taken for the purpose of retirement, the commutation amount of 1/3rd of the fund value is tax free under Section 10(10A) of the Income Tax Act, 1961. However, the received pension and/or the amount received after the surrender of Unit Linked Insurance Plan is taxable.
Recommended Read: Types of ULIPs and Their Tax Benefits