Tax saving is an important part of financial planning, but choosing the right tax saving instrument is much more important. There are various tax saving instrument in the market with different benefits and features and it is your responsibility to choose the best tax saving instrument which fulfills your financial objective. But looking at the current market situation, a ULIP acts as one of the best tax saving instruments.
ULIP plans acts as one of the best tax saving instrument because of the bundle of benefits it offers which includes better return, financial protection and tax saving also. One of the main features of ULIP which makes it unique in the market is the flexibility of investing one’s premium into a mix of equity and debt, which also allows inter-fund transfers through switches without any tax liability. Even the benefits earned from the debt fund are tax free in ULIP.
Traditional life insurance plans offer life protection and tax saving also, but the feature of building a corpus is not that effective while Mutual Funds offer good returns, but it doesn’t give any life protection and tax saving is also limited. On the other hand, a ULIP plan wipes out the disadvantages of the above mentioned financial instruments and gives you a good return with life protection and a very effective tax planning tool.
The dual benefit of insurance and investment in ULIP plans comes with the benefit of tax deduction under section 80C and 10 (10D) of the Income Tax Act, 1961.
A ULIP comes with a lock in period of 5 years during which you can’t make any withdrawal. Even if you make partial withdrawals, the amount cannot exceed 20% of the fund value. This feature allows you to build a corpus for achieving long term goals like building a house, higher education for your children and their marriage, etc. In addition to the opportunity of building corpus, a ULIP also allows you to financially protect your family members against unfortunate events of life.
The premium paid in ULIP is invested in the equity and debt, which distributes the risk. Based on certain conditions, the premium paid in ULIP is exempted from tax liability under section 80C of Income Tax Act, 1961 up to a limit of 1.5 lakh. The only condition for availing tax benefit under ULIP is that the premium amount should be less than 10% of the sum assured.
Top up your investment
ULIP also allows you periodic top ups through which you can invest excess cash. And if the premiums paid are not exceeding 10% of the sum assured then even the top ups are eligible for tax deduction under section 80C as well as 10 (10D). In any case, these exemptions doesn’t affect your financial planning, as these top ups generate additional return to take care of your tax liabilities.
Tax Benefit on withdrawals
In addition to the above mentioned benefits, ULIP offers you tax saving on withdrawals also. The withdrawal can occur on the death of the policyholder, maturity of the policy or at partial withdrawals. The withdrawals received in the form of death benefit or maturity benefit is exempted from any tax liability under section 10 (10D) of income tax act, 1961. The tax saving benefit on withdrawals is one of the best advantages of ULIP over mutual funds.
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So if you are looking for a product which offers the perfect combination of investment, insurance and tax saving then ULIP can be the best choice for you. Many people opt for a life insurance for financial protection and then buy mutual fund for good returns, but managing two financial instruments can become a hassle for you. Along with the various benefits, the risk associated with ULIP varies from low to high. That’s why ULIP is the best tax saving instrument for you. So compare ULIP plans and get the maximum benefit.