ULIP’s or Unit Linked Insurance Plans are instruments that combine life insurance with features of investment. In other words, you are given the dual advantage of a death benefit as well as market-linked returns during or on maturity of the policy term. How does this happen? The premium that you pay is divided into two parts; one goes towards coverage of risk on your life and another part goes towards debt or equity market instruments depending on the option selected. Apart from the combined advantage of investment and insurance that ULIP provides, there are tax benefits also that accrue when you invest in ULIP’s. These tax benefits are two-fold; those that accrue at the time of investment and those at the time of maturity.
Tax benefits during investment.
The amount that you invest in a ULIP is deductible from your taxable income under section 80 C of the Income Tax Act, 1931. So, if you make a premium payment of Rs.30000/- towards a ULIP policy, the same is deductible from your taxable income. The maximum amount of rebate that you can get is Rs.1.5 lakhs. This benefit is available to everyone, irrespective of the Income Tax slab that he falls in. So, for instance, if you invest the entire Rs.1.50 lakhs in ULIPs and fall in the highest tax bracket of 30%, you end up saving Rs.45000(30 % of sum invested) from your tax liability. This is because your taxable income will be computed as total taxable income minus the sum invested as premiums in ULIP. Cool, isn’t it? This benefit is only allowed if your policy has been in force for 5 years. If the UlIP is discontinued before completion of two years, the rebates given in earlier years will be added back to your taxable income.
Tax benefits at the time of payouts
Payouts in a ULIP are possible either a) at the time of maturity, b) at the time of surrender of policy, c) at the time of death of the Life Assured.
a) When a policy matures, the payout given to the policyholder is completely exempt from tax. This is a great advantage which is not available in other investment instruments like F.D’s, MF’s etc.
b) When the policy is surrendered for early withdrawal either partially or fully, the payout received by you is exempt from tax, provided the policy has been in force for 5 years. Also, the premium paid should not exceed 10% of the sum assured(20% for policies issued before April 01,2012).
c) When the policyholder passes away and the beneficiary submits a death claim, the claim payout is completely exempt from tax. This is because a ULIP is considered an insurance product. Of course, the payout can be more than the Sum Assured as there may be market appreciation for the unit-linked investments.
Investing in a ULIP offers you perhaps the best combination of life cover, tax returns and investment. It’s an ideal investment for a person with low to moderate risk appetite. Invest in a ULIP today to reap the tax returns for this financial year.
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