Every individual, corporation, and legal entity is required to pay taxes to the government on the income earned by them. The income tax rates and the income slabs are determined in the Budget by the Finance Ministry and the same is applicable to all the individuals.
Section 80C of the Income Tax Act, 1961 offers exemptions and deductions to the taxpayers from the gross total income. There are various tax-saving investment avenues like life insurance, public provident fund, unit-linked insurance plans (ULIPs), besides others. Out of these, ULIPs are becoming popular among taxpayers.
Many individuals often wonder what a ULIP is,and therefore, we have given an insight into the ULIPs.
What is a ULIP?
The unit-linked insurance plan or ULIP is an investment product which also comes with a life insurance. This means, it provides life cover to the individual taking the policy and offers tax benefits as well. A ULIP is designed to allow individuals to maintain a portfolio between equity and debt, which is based on the knowledge of the taxpayer and the risk appetite. It is advisable to invest in a ULIP which has along-term horizon of atleast 10 years.
Tax benefits of investing in ULIPs
The amount invested in ULIP can be claimed as a deduction under Section 80C or Section 80CCC of the Income Tax Act, 1961. The total deduction allowed under the section is INR 1.5 lakh and the deduction is available upto 10% of the sum assured or the annual premium paid by the policyholder, whichever is lower. Even if you invest a higher amount, the deduction will remain restricted to INR 1.5 lakh.
Duration of the policy
The ULIP should be kept in force for a minimum period of two years in order to claim the deduction under Section 80C. In case the plan is discontinued before two years, the tax benefit would not be available and the deduction allowed in the previous years will also be disallowed.
A ULIP can be purchased in the name of the individual, his spouse, and a child. All the investments will qualify as a deduction under Section 80C.
Tax benefit on maturity
As per Section 10(10D) of the Income Tax Act, 1961, for a ULIP, wherever the premium does not exceed 10% of the sum assured, the amount received on maturity or partial withdrawal is exempt from tax. In case the ratio exceeds the limit during the period of the policy, the additional proceeds will be taxable, except in case of death.
Tax benefit in case of retirement on commutation
As per section 10(10A) of the Income Tax Act, 1961, the commutation is tax-free while the pension received is taxable.
Thus, ULIPs have a dual benefit of tax savingat the time of investment and maturity as well as retirement benefits for the policyholder. It is considered as an ideal investment planin order to save taxes.