One of the crucial element of financial planning is tax saving. However, it is vital to select the tax saving instrument carefully. Numerous tax saving instruments are available in the market, with different advantages and features. The ideal tax saving instruments can be the one which helps a person in attaining his financial goals. A wise financial planning should be the one which helps in achieving the financial objectives along with helping in tax saving.
As far as tax saving instruments are concerned there are numerous conventional options available in the market. One of these types of plans is Unit Linked Insurance Plan (ULIP).
A Unit Linked Insurance Plan refers to a life insurance plan that offers the flexibility for investing in numerous investment options like equity, money market instruments or equity, which help in offering high returns and can help a person to build the corpus. A person can also avail life insurance coverage that helps in ensuring financial protection for the family in case any mishap arises.
Along with the investment and insurance benefit in a ULIP, a person can also get the tax benefits for drawing investment returns.
The Ways in Which ULIP Offers Tax Benefits
A ULIP plan always helps in offering tax benefit which eventually helps to lower the tax liability. The tax benefits under ULIP are as follows:
- Deduction of Tax on Premium Amount: The annual premium amount (along with applicable taxes and cess) for a ULIP eligible to get tax deduction under the 80C section of the Income Tax Act, 1961. The highest limit to get the benefit of the tax deduction under 80C is section Rs 1.5 lakhs. Although a person can invest even more, the deduction can be availed till 1.5 lakh.
There are some conditions related to ULIPS and tax deduction depending upon the year of purchase. These are as follows:
- ULIPs which are purchased later than 1st April 2012: The highest level of tax deduction can be availed in case the premium amount is lower than 10% of the assured amount. For example, if the assured amount is Rs 10 lakhs and its premium is Rs 1.5 lakhs, a person can avail a tax deduction for Rs 1 lakh (which is 10% of the assured amount).If the premium of ULIP is above 10% of the assured amount, the highest level of tax deduction can be 10% of the assured amount.
- ULIPs which are purchased earlier than 1st April 2012: The highest level of tax deduction can be applicable, in case the premium is below 20% of the assured amount. If the premium of ULIP is above 20% of the assured amount, the highest tax deduction can be 20% of the assured amount.
Tax Benefit of ULIP on Maturity
Under the 10 (10D) Section of the Income Tax Act of 1961, a tax-free maturity proceed is offered under ULIP. In this case, the yearly premium is below 10% of the assured amount for all those policies which have been issued later than 1st April 2012. In the case of the policies purchased prior to 1st April 2012, there is a tax exemption on the maturity value in case the annual premium is below 20% of the assured amount. However, it has to be clearly mentioned regarding exemption of income under 10 (10D) section when filing the Income Tax Return.
In case the yearly premium paid to go beyond the given limits which are 10 percent (in case of the policies issued later than 1st April,2012) or 20% (in case of the policies issued prior to 1st April,2012)of the assured amount, the complete proceeds of the policy will be considered as income which is gained from various other sources and hence are taxable based on the applicable tax slab.
In comparison to the mutual funds, the ULIP has tax free investment proceeds, however, in the case of the Mutual Fund; tax has to be paid on the investment proceeds.
Tax Benefit which can be acquired on Death
In the case of the death of the policyholder, the nominees are not liable to pay any sort of tax.
Tax Benefit which can be acquired on Partial Withdrawal
The ULIP offers liquidity as “Partial Withdrawals”. Partial withdrawal allows a person to withdraw a part of fund value established after a given time period. However, this partial withdrawal is allowed only after a period of 5 years. There is the highest and lowest limit for the withdrawals which vary from plan to plan. It is important to note here that there are no tax implications in case of partial withdrawals.
Tax Benefit which can be acquired on Top-up Premium
In case the premiums paid are not going beyond 10% of the assured amount and there is also tax deduction under section 80C and 10 (10D). As there are tax benefits in case of top-up premium so there is no additional tax liability and has no effect on the financial planning. The maximum limit for tax deduction is Rs. 1.5 Lakh under section 80 C.
Tax Benefit which can be acquired under Section 80 CCC
For the pension ULIPs, there is no tax liability for the commutation amount under section 80 CCC under the Income Tax Act. The computation amount is 1/3rdamount which a person can withdraw at the time of maturity prior to the beginning of the pension.
Minimum Policy Term for availing the Tax Benefits
The lock-in period for ULIPs is 5 years. In case the policy is surrendered before that term, the person has to pay the liable surrender charges. In the same manner, for availing the tax benefits on premium under the section 80C, the policyholder is liable to pay the premiums 5 policy years on regular basis. However, the discontinuance of the plan, the person can’t enjoy any tax benefit. The premium which was supposed to be paid the earlier policy years will be added the income of the person in the year when ULIP is discontinued.
Some Other Advantages of Investing In ULIPS
- Flexible Investment Plan: There are numerous risk investment options offered through ULIP, such high risk, medium risk, and low risk and the person get the flexibility to invest the money is any of the investment plan available depending upon the risk-taking capability. One also gets the liberty to switch from one plan to another at nominal charges or free of cost. Generally, the plan holder gets the opportunity to make a lot of free fund switches (as indicated through the policy terms) in one year and then making the switches afterward is chargeable. Fund switching can be carried on the basis of the risk appetite of the person and his ability to balance the equity-debt portfolio. The wise investors try to make most of this option for optimizing his ULIP investment returns.
- Transparency: A ULIP clearly indicates the essential details such as expected returns rate, charges applicable and investment value. One can keep the track of the investment portfolio constantly through Daily NAV reporting quarterly investment portfolio and yearly account statement. A ULIP investment helps in ensuring maximum transparency in the investment amount along with the returns.
- Cost Effective: IRDAI has prescribed the upper limit for the annual charges applicable on ULIPs. Is a person is investing for 10 years; the highest charge is 3% of the yearly invested amount. Charges are applicable even during the lock-up period. However, if a person is investing for more than 10 years, the ULIP charges are only 2.25% on the yearly invested amount. This clearly indicates that long-term investment leads to a lowering of the charges and doesn’t adversely affect the returns.
- Liquidity: ULIP also offers the option to make partial withdrawals for handling the unexpected situations. However, such an option is available anytime after the completion of the first five years.
- Efficient Planning: During the first five years the person can’t any withdrawal. Even after 5 years, the withdrawal can’t be more than 20% of the fund value. Moreover, long-term investment helps in compounding the money and building the corpus for attaining the long-term goals such as buying a house, or securing higher education of the children or on their marriages, planning for retirement, etc. Moreover, a life cover is also offered along with ULIP to protect the close ones against as unfortunate incidence.
- Top-up Premiums: ULIP offers the option to top-up the additional funds along with the regular premium for enhancing the investment. A person can invest in the top-up premium at any time during the term of the plan. A top-up investment helps in raising the value of the funds which is payable at surrendering the plan, maturity or death of the policyholder.
- Returns: The money invested in ULIP, is generally invested in a number of market-related investment plans like equity funds and debt. A ULIP investment can help in earning market-linked returns along with fulfilling the goals. Such a versatile investment plan helps in lowering the negative effects of inflation and helps in securing high returns.
Thus, the numerous benefits associated with ULIP show that it is an ideal plan in the long run which helps in saving money and getting the better returns.