As the end of the financial year comes near, taxpayers become desperate to allow their funds to enter into several tax-saving instruments. The sense of urgency may cause a temporary advantage of saving taxes, but a disadvantage of being unaware of the investment’s long-term consequence. To avoid unnecessary investments, it is wise to invest in the early quarters of the financial year. This gives you enough time to plan your investments. This ensures that, along with saving taxes, your investments are aligned with your financial goals. One such tax-saving instrument you can invest your money in is Unit Linked Insurance Plans (ULIPs).

What are ULIPs?

ULIPs are a combination of investment and insurance. It is a financial instrument where a part of the money you invest is used to provide you a life cover while the remaining sum is further invested. When you buy this plan, they require you to pay premiums annually, quarterly, or monthly. Based on your risk appetite, there are several types of ULIPs available in the market.

When you are buying a ULIP, you are getting a life cover. However, along with that, you need to understand which investments meet your financial goals the best. If you will go for risky investments, equity funds would fit your portfolio perfectly. Equities give high returns to your high risks. If you want to play safe, consider a debt fund. which is a low-risk investment, but also gives you low returns. Balanced funds are the mid-way to go. They comprise both equity and debt funds. One of the biggest selling points of a ULIP is that you can switch amongst the funds you choose. You can switch from debt to equity or vice versa in a hassle-free manner.

What are the tax benefits that a ULIP offers?

The flexibility of a ULIP makes it a one-of-a-kind investment. Apart from it providing life cover and great returns on investments, a ULIP also has several tax benefits.

Here are some tax benefits of ULIP

Tax benefits on the premiums paid

When you buy a ULIP, you can avail the premiums you pay for tax deductions. As ULIPs provide insurance, you can claim the premiums towards them under sections 10D and 80C of the Income Tax Act, 1961. Exemption on premiums makes ULIPs one of the best long-term tax-saving instruments.

Tax advantage in the long haul

To avail of all the tax benefits of a ULIP, most people prefer to use ULIP as a long-term investment. During the lock-in period, which is usually five years, you would have saved taxes for at least five consecutive years as all the premiums you paid for these five years would be tax-free.

Tax benefits on the maturity of the ULIP

The different types of ULIPs are all market-linked investments. Suppose you buy a ULIP for 5 years, after the maturity, the amount you received is free of taxes. As per section 10 (10D) of the Income Tax Act of 1961, the sum received after the maturity of a ULIP is free from all taxes. If you had bought a plan before April 1, 2012, the annual premium that you pay for the plan should be less than 10 percent of the sum assured. However, if you bought a plan after April 1, 2012, the yearly premiums should be less than 20 percent of the sum assured. To claim the benefits of maturity, you need to meet this condition.

Tax benefits on partial withdrawals

If you need funds urgently, you can withdraw partial funds from your ULIP plan. If you are withdrawing funds after a 5-year lock-in period, you won’t have to pay any taxes for those withdrawals. To claim tax-free withdrawals, ensure that the withdrawals do not exceed 20 percent of your overall fund amount.

Exempt from taxes in case of death

In case of any unfortunate scenario of your demise, your nominee can claim the sum assured, along with the returns generated from your ULIP. These payouts are all exempt from your Income Tax.

Tax deductions on top-ups

As your earnings increase, change your investments by buying top-ups on your existing ULIP plan. You can claim tax benefits on these additional top-ups too under sections 80C and 10D of the Income Tax Act.

When compared to other traditional plans, ULIPs have several benefits. It is a great financial instrument for creating wealth and protecting your family’s future, too. Also, you can save taxes on all the elements of a ULIP.