5 Quick Tax Saving Tips with ULIP Apart from Section 80C

When it comes to financial products in India, you need to keep two primary factors in mind- the potential rate of returns and the tax liability.  insurance products like Unit Linked Insurance Plan are still exempt from taxes. Investors are switching to ULIP because of the relatively superior return and ‘ULIP tax benefit’. It is time to switch to ULIP or invest in a ULIP if you have not started already. 

Tax Benefits for Unit-Linked Insurance Plans 

ULIPs are primarily life insurance plans, which means that they enjoy the same tax benefits that are applicable to other insurance products. The two main tax benefits for ULIPs are tax deductions under Section 80C and tax exemptions under Section 10(10D) of the Income Tax Act, 1961. In this blog, we will focus on the advantages of Section 80C and how you can make the most out of this tax benefit. 

Section 80C 

Under section 80C of the Income Tax Act 1961, the premium you pay towards your ULIP is tax-deductible. It means that the amount you pay as a premium (up to 1.5 lakhs) is provided as a tax deduction which lowers your taxable income. If you want to save more tax, you can choose a ULIP with a high premium amount, as long as you can consistently pay the premiums. It will allow you to get higher sum assured and higher tax benefits. For example, if you pay 1 lakh as premium, your taxable income will be lowered by 1 lakh. If you are in the 30% tax bracket, you can save tax of Rs. 30,000. 

How Can You Save Tax Through ULIPs? 

Hold on to ULIPs for at least two years: 

ULIPs have a lock-in period of 5 years, which is one of the lowest when compared to other tax-free investment options like PPF. But you should keep your ULIP for at least two years to avail the tax benefits under section 80C. If you choose to discontinue your ULIP before two years, no deduction under section 80C is allowed and the deduction availed in the previous year is added back to your taxable income. 

Be cautious about partial withdrawal: 

If you are planning to withdraw money from your ULIP, you should buy a policy where the premium payable does not exceed 10% of the sum assured in any financial year. If the premium paid is within the 10% limit, the partial withdrawal you make is exempt from tax. This is also true for the amount received on maturity. If the above-prescribed limit is exceeded in any given financial year, all the proceeds from that year on, are taxable under the ‘Income from other sources’ head of the Income tax. Hence, for saving tax under ULIP, try to pay a premium which does not exceed 10% of your sum assured. 

Buy the ULIPs online: 

While ULIP tax benefits are the most attractive thing for an investor, there are numerous other benefits which answer the question of ‘Why I should invest in ULIP‘. With the introduction of new age online ULIPs, costs like administration charges, fund management charges, premium allocation charges, surrender charges have come down by a considerable margin when compared to offline ULIP plans. While they do not directly reduce your tax liability, they will let you save money on the overall ULIP and serve the common purpose of increasing your savings. The tip is to buy your ULIP plan online. 

Buy only after comparing: 

Every ULIP comes with a tag of tax saving, but the extent to which you can save tax depends on how good the policy itself is. You should buy a ULIP only after comparing different insurance companies. The best-suited ULIP complements your financial plan perfectly apart from allowing you to save tax in the process. The whole point of saving tax is to increase your lifelong savings, and you should find a ULIP that not only allows you to save tax but also charges you less than the other plans, thus increasing your savings. 

Edelweiss Life – ULIPs are one of the most affordable ULIPs in the market and come with tax benefits under section 80C and 10(10D). With no other hidden cost, you can increase your savings further than the tax benefits every other ULIP provide. 

Remember to Choose the Old Tax Regime: 

Tax benefits under Section 80C are only applicable if you choose the Old Tax Regime. The New Tax Regime does not provide the same tax benefits. If you are buying a ULIP for tax saving purposes, opting into the Old Tax Regime is a must. You can choose your preferred tax regime while filing your income tax returns during the beginning of a new financial year. 

FAQs 

What is Freelook Period? 

Freelook period is basically a trail period during which you can cancel your insurance policy and get back all the premiums you have paid. You have a freelook period of 30 days from the date of the receipt of the policy document for the policy issued after 1st April 2024 and processing TAT for same is 7 days. 

What is Death Benefit in a ULIP? 

ULIPs are life insurance plans and hence come with a death benefit that is payable to your nominees. The death benefit is paid out in case of your untimely passing during the policy term. There are two types of death benefits in ULIPs: 

Type 1- Death benefit is higher of sum assured or fund value.  

Type 2- Death benefit is the total of sum assured plus the fund value.  

Is Policy Maturity Amount Taxable? 

Policy maturity amount in ULIPs can be taxed if your plan does not meet the terms of Section 10(10D). If your annual premium exceeds ₹2.5 lakhs, then your returns will be taxed as capital gains. However, if your premiums fall below this limit, then your returns will be exempt from taxes thanks to Section 10(10D).  

Is ULIP Taxed About ₹2.5 Lakhs? 

Yes, ULIP returns will be taxed as capital gains if your annual premiums are greater than ₹2.5 lakhs.  

Chirag Iyer - BFSI Enthusiast 

Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.