ULIP: Tax Advantages of Unit Linked Insurance Plan

A Unit Linked Insurance Plan is a blend of insurance and investment profiles. It provides life cover protection along with wealth creation benefit of the investment. When you pay a premium towards a ULIP plan, it gets divided into two parts. One part goes to the premium of life cover while the other part gets invested across various funds depending on your risk appetite, like equity funds for high-risk appetite, debt funds for low-risk appetite, and balanced funds for medium risk appetite.

There is no doubt that ULIP plans have proved to be one of the best tax saving investment options in the market. You hardly find an investment option that offers benefits of both insurance protection and wealth creation like a ULIP plan does. In fact, it gives better returns than many tax saving investment options like fixed deposits, post office deposits and even NSC that come with the same lock-in period of 5 years. Guess what the extra perk is? Not just the ULIP plan premiums enjoy tax deductions, but the maturity benefits are tax-free as well.

Let’s have a look in detail about the tax advantages that come along with ULIP plans.

  1. Tax benefits on premiums of ULIP plans – The first advantage that grabs the attention of many people investing in ULIP plans is that the premiums paid towards it are eligible for tax deductions under Section 80C and 10D of the Income Tax Act. However, you should maintain the investment in ULIP for the entire lock-in period of 5 years to enjoy the tax benefits. ULIP is the sole plan that offers tax benefit not just on its premiums but also comes with tax-free maturity advantage.
  2. Tax-free withdrawals on death – If the policyholder dies during the term period, then the family of the insured person under the ULIP plan will receive the sum assured amount along with the returns reaped from the investments. The payout is completely exempt under the income tax rule and allows tax-free withdrawal even if it is partial.
  3. Deduction on periodic top-ups – To boost the investments, ULIP plans offer periodic top-ups. These top-ups enjoy tax benefits under Section 80C and 10D of the Income Tax Act. While the general profit earning shares like ELSS and equity mutual funds are subject to LTCG tax for above 1 lakh, ULIP plans are free from tax liabilities.
  4. Long-term benefits – You must have heard how investment plans can work wonders if you show some patience and stay invested for a longer duration. The same thing applies to the ULIP plans. When you invest in ULIP, the lock-in period is 5 years. Thus, you get the benefit of saving tax on premiums for 5 consequent years. If you stay longer, then the gains keep growing with each year.

There are many traditional insurance plans that provide you protection but don’t help in growing wealth. Whilst investing schemes like mutual funds reap good returns on investment but don’t provide any risk protection. Thus, ULIP plans are the only market-linked plans that come with the benefit of both and the tax advantages tagged along.