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Ways to Minimize Income Tax through ULIP

dateKnowledge Centre Team dateNovember 27, 2020 views89 Views 4 Minute Read

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 , which offers a range of benefits. You can easily opt from between 8 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 , you can easily earn high returns through a choice of 8 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.

1. 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 under section 80C, 80CCC and 80CCD(1) is Rs. 1,50,000 cumulatively.

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 1,50,0000. 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.

2. 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%

3. 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 Life Insurance. Not only can you flexibly switch between 8 different funds and 4 portfolio strategies, you can also partially withdraw funds to meet any unexpected financial emergencies that may creep up.

Hi, I am Radhika Palkar, a professional Chartered Accountant associated with an esteemed CA firm based out of Mumbai. My area of focus has been in advising foreign companies in managing their operation in India and administering and looking after them. Today I am here as part of the Tax video series by Canara HSBC Life Insurance Company. In this video I will be talking about the ULIP or Unit link insurance plan which is an efficient tax-saving instrument used to minimize the tax burden of an individual, first I will explain the concept of ULIP and then move on to explain how it can be used to minimize the tax burden.

Unit Linked Insurance Plan is a combination of life insurance with investment. A part of the premium goes towards the life insurance and the balance towards investment in either equity or debt and equity funds. One of the benefits of ULIP is that you can decide as to where your premium would be invested the type of fund in which you want your ULIP to be invested and you can also switch between the funds during the tenure of your investment.

The contribution for participating towards Unit Linked Insurance Plan (ULIP) eligible for Income Tax deduction, that is the premium you would pay towards the ULIP qualifies for deduction under section 80C of the income tax act and is capped at rupees 1,50,000 per Financial Year.

Now see for an example, the sum assured is 14 lakhs and you are contributing 2 lakhs in a financial year then you would be eligible for deduction of rupees 1 lakh 40 thousand only in 10% of the sum assured and not rupees 2 lakhs.

Moreover, ULIP must be kept in force for 5 years to avail the tax benefits also the premiums must be paid regularly so that you can avail the tax benefit every year In case if the ULIP is discontinued then the premiums that were allowed as deductions would be added back to the income in which the ULIP is discontinued, the income received on maturity of the ULIP is also exempt under section 10 (10D) of the income tax act.,

However, this exemption is allowed only if the premium amount paid is 10% of the sum assured, in case if the premium paid is more than 10% of the sum assured then the income and maturity of the ULIP are fully taxed in the year of closure of the ULIP and it is taxed as per the slab rates applicable, the contribution for ULIP can be for the individual himself the spouse of the individual, the child of the individual, the child can be major, minor, dependent, independent female, male, it can be anyone.


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