How to save Income Tax with ULIP Investment Plans

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When planning your financials, it is important to keep tax in your mind. This will not only help you plan your financials well, but also save your hard-earned money wherever you can and also enjoy some benefits. Tax planning strategies will allow you to claim exemptions, deductions and rebates under different IT provisions and Acts. Hence, it is important to learn all that you can or consult an expert to understand better.

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ULIP plans that are offered by many life insurance companies are one of the best ways you could save on tax. Besides, they also come with a lot of benefits that can prove to be extremely beneficial to you and your family. Depending on your tax bracket, ULIPs can actually help you save up to INR 45,000 or more, every year.

What is a ULIP?

The full form of ULIP is Unit Linked Insurance Plans. ULIP is a combination type of investment where the policyholder is allowed to pay a premium amount either monthly or annually. With this type of policy, a small part of your premium will go to secure life insurance, while the rest of your money is invested in debt or equity schemes.

With a ULIP investment, you have the option of selecting the type of fund you would want your premium to be invested in. A policyholder would keep on investing throughout the term of the policy – that would be 5, 10 or 15 years. A more conservative investor could go in for a debt option, while the aggressive ones could pick equity plans.

Types of ULIPs

There are different types of ULIP investments that you can make.

Equity funds – With this type of fund, the premium that you pay is invested in equity. This kind of investment is subject to higher risk factors.

Balanced funds – The premium you make with this type of ULIP is that it is balanced between the equity market and the debt in order to minimize the risk.

Debt funds – With this type of ULIP, the premium would be invested in debt funds. This comes with lower risk, but also offers lower returns too.

End Use of Funds

You could use your ULIP investment funds in the following ways:

  • Retirement planning – If you’re looking to invest for your retirement days while you are still working, ULIPs are a good way to go to save up for your future.
  • Child Education – ULIPs are also a good way to save for long-term goals like children’s education or other unforeseen circumstances.
  • Wealth Creation – If your intention is just to make an investment to build a good corpus so that you could use it for your future financial plans then ULIPs are a great way to save for that.

Save Tax Under Sections 80C & 80CC

Just like all your other life insurance investments, the amount that you also invest in a ULIP plan can help you save on your tax. The two provisions of the income tax Act that would be applicable for a ULIP are Section 80C and Section 80CC.

According to these tax provisions, there would be an exemption of up to Rs.1, 50,000 under Section 80C and Section 80CC. This also means that you could invest in a higher amount, but the total deduction would be capped at Rs.1, 50,000 per annum. However, the important thing to keep in mind is that your yearly premium should be less than 10% of the sum that is offered by the ULIP plan.

Another thing with regards to ULIPs is that in order to claim for deductions, your ULIP plan must be active for at least two years. Also, if you happen to stop your ULIP plan during the second year, all benefits that were availed in the first year would be withdrawn. So ensure that you have long-term investments and you continue to make payments towards the premium amount for the entire term.

Other Benefits of ULIP

Some of the other benefits of ULIP investments are:

  • Life Cover – ULIPs come with life cover as well as investment. It gives security to a taxpayer’s family in case of emergency like the untimely death of a taxpayer.
  • Long Term Goals – In case you have long-term goals like marriage, buying a house or a new car and suchlike, then ULIP is the perfect investment option for you. Since the money in ULIPs are compounded, the net returns that you get would be more.
  • Flexibility of Portfolio Switch – ULIPs are designed in such a way that they give you the freedom to switch your portfolio based on your risk and knowledge of the market.

Other Things to Consider as an Investor

Following are some of the important things to consider before you invest in a ULIP plan:

1. Personal financial goals – ULIP investments are one of the best options available in the market today if your financial goal is to save money for your retirement or other life goals. ULIP returns are also good if you make the right investment choice.

2. Compare ULIP offerings – Once you have decided on your financial goals and zeroed in on the ULIP that will help you achieve it, your next step would be to compare all the different ULIP offerings in the market. You could check out things like ULIP performance, background expenses and premium payments. You should also investigate the funds that your ULIP would invest in to check on the ULIP returns to see if they are beneficial or not.

3. Risk factor – The risk factor with a ULIP plan is a bit high as compared to other type of schemes and plans.

4. Investment – This is another important factor to consider when you go in for a ULIP plan. ULIPs come with a 5-year lock-in period, so if a ULIP is given up within the first three years, then your insurance cover would also stop immediately. And, the value would only be paid after three years.

So do a thorough research and sign up only once you have a better understanding of the product.