Unit-Linked Insurance Plans (ULIPs) provide a one-of-a-kind opportunity to build wealth over time by investing in both insurance and equity.
A ULIP Is a powerful instrument for reaching financial milestones like marriage, retirement, and education, in addition to protecting against life’s uncertainties.
Rakesh Goyal, Director, Probusinsurance.com shares major tax-efficient strategies, by integrating which, investors can unlock the full potential of ULIPs, not only as a shield against risks but also as a robust vehicle for long-term wealth creation and tax planning.
Goyal has given 5 major tips to harness the full potential of ULIPs for tax planning, consider the following 5 strategies
Similar to traditional life insurance products, purchasing a ULIP provides tax benefits under Section 80C of the Income Tax Act. Policyholders can avail themselves of a tax exemption of up to Rs 1.5 lakh by investing in ULIPs.
Maturity proceeds from ULIPs are exempt under Section 10 (10D), provided the total premiums paid do not exceed Rs 2.5 lakh in any financial year during the policy term. The budget for FY 2021–22 made the changes in these provisions. However, if premiums surpass this threshold, profits become subject to capital gains tax.
To optimize tax benefits and capitalize on compounded growth, it’s advisable for policyholders to commit to ULIP investments for a minimum of five years. Exiting the policy prematurely (before five years) may lead to the inclusion of previously claimed deductions in taxable income.
Younger investors can opt for aggressive equity allocations within ULIPs to harness the power of compounding and potentially higher long-term returns.
Take advantage of ULIP’s flexibility by periodically switching between investment funds to optimize returns. For instance, during market downturns like the March 2020 correction, shifting from debt or hybrid funds to equity can enhance potential returns. Importantly, there are no tax implications associated with such intra-ULIP switches.