Ways To Reduce Income Tax Using ULIPs

The ULIP tax benefits, which apply and help you save money on taxes, make this instrument even more viable. Most investment products are designed to help you save money on taxes, but a ULIP allows you to earn a lot of money while also saving money on taxes. When it comes to investing, the two critical aspects to consider are security and rewards. Both are guaranteed when you invest in a ULIP. Other investing choices, such as retirement endowment plans, offer lower average returns than ULIPs. One of the grounds why ULIPs are so profitable is that the premiums are focused on market-linked returns. This makes ULIPs suitable for everybody, from those just starting out in the workforce to those in their forties who are starting to save for retirement. ULIPs can also be used to save money for a specific reason. ULIPs are an excellent method to save for a family vacation, or even for your children's education or wedding plans because they have a lock-in period of usually 5 years. 

Ways To Reduce Income Tax Using ULIPs

The following are some of the ways to reduce income tax using ULIPs:

1. Benefits Of Investing

Sections 80C and 80CCC of the Income Tax Act of 1961 provide for tax deductions on ULIP premiums. The maximum deduction amount is set at Rs. 1.5 lakh in both of these areas. Only ULIPs are covered by Section 80C, which allows for withdrawals of up to 10% of the lesser amount assured or the yearly premium. The deductions are also capped at Rs. 1.5 lakh under Section 80C, which applies specifically to pension ULIPs. Because the Section states that deductions can be claimed on "any sum paid to retain in force" a policy, you could also include expenses paid to your assurers such as service tax and others.

2. Tax Benefits On Partial Withdrawals

Tax benefits on ULIPs are available under Section 10(10D) of the Income Tax Act, 1961, for amounts withdrawn partially from a ULIP fund or upon the fund's maturity. If the premium paid to the sum assured does not exceed 10%, the amount received as a partial withdrawal or upon maturity is totally tax-free. Exemptions are only available for policies purchased before April 2012 if the premium-to-sum-assured ratio is less than 20%.

3. Commutation Benefits

Section 10(10A) applies to pension ULIPs that have a portion of their value commuted. While the commission is tax-free, surrendering the policy or receiving the pension payment is not.

Conclusion

Despite the fact that your ULIP provides you with a variety of tax advantages, there are a few things to keep in mind in order to make use of these advantages. Your ULIP money must be locked in for at least two years in order to qualify for the benefits under Section 80C of the Income Tax Act, 1961. This means that in order to be eligible for the tax benefits, you must have paid premiums consistently for at least two years. Whatever tax exemptions you received in previous years for your ULIP assets will be refunded to you in the year the ULIP is closed. 

Also read - How to Choose the Best ULIP Investment Plan?

Saving With ULIPs During COVID-19 Pandemic: Everthing You Need To Know

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.