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ULIP Tax Benefits: How to Save Tax with ULIPs

Apart from helping you generate wealth, a ULIP can also help you save tax. Want to know how? Then read this article to find out.

A unit linked insurance plan (ULIP) is one of the most unique investment instruments. This is because a ULIP serves two purposes. A ULIP allocates a part of the premium in various equity and debt schemes. Meanwhile, the remaining amount is used for life insurance cover.

A ULIP provides the benefit of a mutual fund scheme as well as a life insurance policy. While mutual fund schemes allow investors to earn good returns, they don’t provide life cover. Life insurance policies offer life cover, but they don’t help policyholders make significant returns.

Here are a few types of ULIP Plans-

  • Equity Funds

These ULIPs invest in stocks and equities. You should consider these ULIPs if you have a high-risk appetite. However, these plans can also generate higher returns.

  • Debt Funds

Primarily, these funds invest in various debt instruments like money markets, government securities, etc. Compared to equity funds, debt funds are less risky. These funds provide moderate to low returns.

  • Cash Funds

These funds invest in money market instruments like treasury bills, cash deposits, etc. If you don’t want to take a lot of risk with your investment, then you should consider cash funds.

  • Balanced Funds

These funds invest in equity as well as debt instruments. Your investment will be distributed between fixed-income securities and high-risk equities.

Now that you have an idea about a ULIP, let’s take a look at how it can help you save tax.

  • Under Section 80C, you are allowed to avail a tax deduction on the premiums that you pay for your ULIP You can avail a tax deduction up to Rs. 1.5 Lakh.
  • Under the Income Tax Act, ‘any sum paid to keep in force’ a life insurance policy is allowed as deduction. This means the service tax and other charges that you pay to the insurer can also be claimed for Section 80C deduction.
  • A unit linked insurance plan allows you to save tax while paying premiums as well as while receiving the maturity amount. However, in order to receive a tax exemption on maturity, the premium amount should be less than 10% of the sum assured.
  • If the policyholder passes away, his/her nominee will receive the returns accumulated by the plan and a sum assured. This payment is also exempt from taxes.
  • With a ULIP, even partial withdrawals can be tax-free. However, the withdrawal amount shouldn’t exceed 20% of the fund value.
  • A ULIP allows you to buy periodic top-ups in order to increase your investment. Under Section 80C, even these top-ups are eligible for tax deductions.
  • A ULIP is especially beneficial if you plan to invest for a long time. For instance, if you invest in a ULIP that has a lock-in period of 5 years, then you can save taxes consecutively for 5 years on the premiums that you pay. If you continue investing in the plan, then you can gain even more tax benefits.

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