If you are a well-earning individual, you must be aware of the taxation system in the country. But, do you know about tax planning? Tax planning is the act of arranging your finances to better manage your tax liabilities. Often, a big part of tax planning is focused on ways to reduce tax liability. Most people believe that income tax is extremely simple. They believe that they have to pay the right amount of tax and failing to do so means they can land in legal trouble. While it is true, there are ways that you can reduce your income tax by a long margin. These include claiming deductions, exemptions, etc. One of these options is buying a ULIP plan.
What Is ULIP?
ULIP i.e. Unit-linked insurance plan, these plans offer a combination of life insurance and investment opportunities. Just like other life insurance products, ULIPs require you to make premium payments. ULIPs allow you to select the fund you want to invest in depending on the return potential and your risk appetite. To make it simpler, ULIPs are quite similar to mutual funds. The biggest difference is that they have an extra benefit of insurance coverage. ULIP plans sold by different life insurance companies have a host of benefits. One of which is tax saving. Here are the different ways you can save tax with ULIP plans:
- Tax deduction on premium
One of the ULIP tax benefits, is through its premium. Simply put, the premium you pay on your ULIP plan makes you eligible for an income tax deduction. The logic is that the amount you pay as a premium can be deducted from your taxable income. With a lower taxable income, you would have to pay a lower tax. You can deduct a maximum of ₹ 1.5 lakhs from your taxable income. This benefit is offered under Section 80C of the Income Tax Act.
- Maturity tax benefits
The word maturity itself implies that a process has been completed. In case of ULIP plans, this means that the plan has reached its maximum term. While you may have saved a lot of tax under the ULIP plan, what happens when the plan reaches maturity? You would liquidate all your investments once the plan is matured. This means you will receive a maturity payout. This raises doubt about income tax, and more specifically, whether this payout will be taxed under the Income Tax Act or not.
The good news is that this payout will be exempt from income tax on one condition. This condition is that all your past premium payments have been made. ULIPs offer tax-free maturity amount under Section 10 (10D) of the Income Tax Act.
- Tax exemptions on death benefit
In case of the policyholder’s death, his/her nominees will receive the payout known as the death benefit. This death benefit will either be the sum assured of the policy or the total value of the investment fund built by the policyholder. At the time of a claim, the insurance provider will check which of the two is higher and disburse the funds.
Once, the payment is received, the most natural question that would come to mind is, ‘Would you have to pay tax on the payout received from the ULIP plan?’. The simple answer is no! Any payout received from ULIP investment is exempt and will not be considered as taxable income. This means you can keep the money aside for all your needs without the worry of income tax.