When we consider investing, it is usually with respect to accomplishing specific financial goals. People typically count a life insurance plan as one of the top most-needed investment instruments to ensure the medical needs of themselves and their families are taken care of. The surplus amount earned is usually invested in funds to gain reasonable returns over time.

How about we tell you that your insurance, as well as investment needs, will be covered under a single plan? Yes, with Unit Linked Insurance Plans (ULIPs), you can enjoy dual benefits – enjoy life insurance coverage and investment in funds of your choice. Let us read about ULIPs in detail.

What Is ULIP?

Like we mentioned earlier, ULIP is an investment instrument that allows you to benefit from life insurance coverage and invest in funds of your choice. Here, a part of your premiums is paid towards life coverage while the remaining about is invested in equity-oriented funds, debt funds, or a combination of the two.

One of the unique benefits of ULIP is tax benefits. You can avail the tax benefits throughout the policy term and even on the maturity of the policy. ULIPs also provides flexibility to you (the policyholder) by allowing you to switch from equity funds to debt funds and vice versa, depending on the market performance.

In this article, we will be mainly focusing on ULIP tax benefits. Let us begin.

1. Tax Benefit On Premiums Paid

The premiums paid towards ULIPs are tax-deductible under Section 80C of the Income Tax Act, 1961. The amount exempted for tax is up to INR 1.5 Lakhs. However, for your premiums to be exempted for tax, the only condition is that the premium amount should be less than or equal to 10% of the sum assured amount. 

For instance, if your sum assured is INR 50 Lakhs and the annual premium paid towards ULIPs is more than INR 1.5 Lakhs, then the tax deduction is capped at INR 1.5 Lakhs. Note that this is only applicable for ULIPs taken after April 1, 2012.

For ULIPs taken before April 1, 2012, the maximum tax-deductible amount can be availed if the premiums paid annually are equal to or less than 20% of the sum assured amount.

2. Tax Benefits On Maturity

One of the unique benefits of ULIPs is that the maturity benefits are tax-free under Section 10(10D) of the Income Tax Act, 1961. Here, the only condition applicable is that the premiums paid annually need to be less than 10% of the sum assured value (for plans bought after April 1, 2012). For policies purchased before the said date, the maturity amount is tax-free only if the annual premiums paid are less than 20% of the sum assured amount. Also, the death benefits offered under ULIPs are tax-free.

3. The LTCG Advantage

ULIPs also continue to exempt from Long Term Capital Gain (LTCG) tax, which was established in the Union Budget 2018. As a matter of fact, ULIPs are the only investment instrument that is exempted from tax under LTCG.