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Ways to Minimize Income Tax through ULIP

Ways to Minimize Income Tax through ULIP

Income Tax

One of the first concerns most people have when they begin earning is whether it is more worthwhile to invest their money into generating higher returns or whether they should first safeguard themselves and their money through a life insurance policy.

Unit Linked Insurance Plans (ULIPs) are fast growing in popularity owing to their ability to serve both purposes. A ULIP acts both as an insurance product while also being an investment instrument which can help you earn significant returns. For instance, you can opt for the Invest4G Plan, available on Canara HSBC Oriental Bank of Commerce, which offers a range of benefits. You can easily opt from between 7 different funds and 4 portfolio strategies in accordance with market conditions, and ensure that you are always on top of the market curve in terms of returns.

What makes this instrument even more viable are the ULIP tax benefits that apply and help you save on taxes. Most investment instruments are structured to help you save taxes, but with a ULIP you are earning a high amount of benefits while also saving taxes. This makes ULIPs ideal for everyone, right from a person who has newly begun working or someone in their 40s who is beginning to start saving for their retirement. ULIPs are also a great way to save up for a particular purpose. Since they come with a lock-in period, usually of 5 years, ULIPs are a great way to save up for a family holiday, or even if you want to save up for your children’s education or wedding plans. With the Invest4G Plan, offered by Canara HSBC Oriental Bank of Commerce, you can easily earn high returns through a choice of 7 different funds and 4 portfolio strategies. Its versatility as a life insurance policy also lets you earn the Mortality Charge upon maturity of the fund.

The tax benefits offered by the government on ULIPs are among the best benefits available on any type of investment instrument under the Income Tax Act, 1961. Read on to learn more about ULIP tax benefits.

  • Benefits while Investing: Under the Income Tax Act, 1961, Sections 80C and 80CCC both enable tax deductions for the premiums paid towards a ULIP. However, under both these sections, the maximum limit of deduction is capped at Rs. 1.5 lakh. Since ULIPs can cover a wide range of instruments, Section 80C pertains to life insurance ULIPs and grants deductions of up to 10% of the lower amount from among the sum assured or the annual premium. Under Section 80CCC, which applies exclusively to pension ULIPs, the deductions are capped at Rs. 1.5 lakh as well. Since the Section mentions that deductions can be claimed on “any sum paid to keep in force” a policy, you could also mention the expenses incurred such as service tax and others which have been paid to your insurer.
  • Benefits on Partial Withdrawals/Maturity: Tax benefits are available on ULIPs under Section 10(10D) of the Income Tax Act, 1961, pertaining to the amount withdrawn either partially from a ULIP fund or upon maturity of the fund. The amount received as a partial withdrawal or upon maturity is completely exempt from tax if the premium that is payable to the sum assured does not exceed 10%. However, for policies that were purchased before April 2012, the exemptions are only applicable if the premium to sum assured does not exceed 20%.
  • Benefits on Commutation: Section 10(10A) pertains specifically to pension ULIPs where an amount is commuted. While this commission is completely tax-free, surrendering the policy or the pension amount received is still taxable.

However, even though your ULIP allows you a range of tax benefits, there are several considerations you need to keep in mind to get these benefits. In order to claim the benefits under Section 80C of the Income Tax Act, 1961, your ULIP fund needs to stay locked in for a period of at least 2 years. This means that to get the tax benefits, you need to have been regularly paying premiums for a period of 2 years to be eligible for these benefits. If you had received any tax deductions for your ULIP investments in the previous years, it will be added back to your income in the year you close the ULIP.

In order to ensure that you have the highest returns, while also receiving the ULIP tax benefits, make sure to opt for the Invest4G, available on Canara HSBC Oriental Bank of Commerce Life Insurance. Not only can you flexibly switch between 7 different funds and 4 portfolio strategies, you can also partially withdraw funds to meet any unexpected financial emergencies that may creep up.

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Annual Income (In Lacs)


In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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