Over the next two months, most of us would be filing our tax returns for the financial year 2020-21. This is the time when many realise how they could have done a little more to save a little more money in taxes through different deductions that are available under the Income Tax Act 1961. While the time that has gone cannot be brought back, you can definitely review your tax planning for the current financial year, so you do not find yourself in a similar situation again next year.
In terms of tax saving instruments, life insurance is often at the top of the list for most people. However, lately, ULIPs, or Unit Linked Insurance Plans, are emerging as one of the most preferred instruments among the life insurance schemes.
What is a ULIP?
Unit Linked Insurance Plan offers life insurance with investment. A part of the premium is utilized for insurance cover to the policyholder, while the remaining amount is invested in various equity and debt schemes. Moreover, with ULIPs, you can select the type of fund (with varying degrees of risk-return potential) where you want your premium to be invested. In effect, ULIPs are akin to mutual funds, with the additional benefit of life cover.
Save tax under Sections 80C & 80CCC
As with all life insurance plans, the amount invested in a ULIP is available for tax deductions. This follows from the income tax provision that ‘any sum paid to keep in force’ a life insurance policy can be claimed as a deduction. Hence, you can even include the extra components like service tax, etc., that have been paid to the insurer. The two key provisions of the Indian IT Act that are applicable here are the section 80C (life insurance premium is exempt from tax) and section 80CCC (amount paid towards pension plans is tax-exempt).
1. Tax benefit on premium :
The premium paid towards a ULIP plan is allowed as a deduction from the current permissible limit of ` 1.5 lakh under Section 80C of the Income Tax Act, 1961. The only condition is that the premium amount should be less than or equal to 10% of the sum assured. For instance, if the sum assured is ` 50 lakhs and the annual premium paid is more than ` 1.5 lakhs, then the deduction is capped at ` 1.5 lakhs. This is applicable if the policy is purchased after April 1, 2012.
However, if the policy is acquired before April 1, 2012, the maximum tax deduction can be availed if the premium amount is less than or equal to 20% of the sum assured.
2. ULIP Tax Benefits on Maturity
A unit linked insurance plan is the only market-linked investment instrument that is not liable for tax even after maturity. Therefore, you save tax both ways – while paying premium and while receiving the maturity amount. However, the premium amount must be less than 10% of the sum assured to avail tax exemption on maturity.
3. Tax-free Withdrawals on Death
In case of the death of the policy holder, the family receives a sum assured amount plus returns generated by the ULIP plan. This payout is exempt under income tax rules.
4. Tax-free partial withdrawals
If you wish to withdraw money from your ULIP plan after the five-year lock-in period, you don’t have to pay any taxes on that withdrawal, provided the amount withdrawn is less than or equal to 20 per cent of the sum assured.
5. Long-term Tax Benefits
You can derive tax benefits of ULIPs with a long-term investment horizon. Since the lock-in period for ULIP is 5 years, you gain by saving tax consecutively for at least 5 years on your insurance premiums. If you continue with your policy, you stand to gain more ULIP tax benefits over the years.
