Exempt-Exempt-Exempt Tax Benefit of ULIPs

ULIPs could be the perfect investment choice for you if you’re seeking a way to get a lot of advantages all at once. You can rely on ULIP tax benefits in addition to the returns from ULIP programs.

As a result, these unit-linked insurance plans offer you not only the benefit of market-linked returns but also a life insurance policy that safeguards the future of your loved ones. The Exempt-Exempt-Exempt (EEE) tax benefit that ULIPs provide is another benefit in addition to this. 

ULIP: What is it? 

A unit-linked insurance plan, or ULIP plans, is a type of investment that has a five-year lock-in term. The policyholder receives the benefits of both investments and insurance.

Policyholders can invest in equities funds, debt funds, etc., based on their risk tolerance and investment objectives. The insurer also provides insurance coverage to policyholders. The insurer requests regular payments known as premiums in exchange.

The insurer pays the nominee the death benefits in the event that the policyholder dies while the plan is still in effect. On the other hand, if the policyholder lives to see the end of the policy term, they will get the returns from the ULIP plan when the policy matures. 

What does the term EEE tax benefit mean? 

Exempt-Exempt-Exempt is referred to as EEE. In essence, this means that investments in EEE tax saving instruments provide tax exemptions or benefits at the following three stages of the investing process: 

  • How much was invested 
  • Gains or interest accrued on the investment 
  • The amount is withdrawn or the maturity value 

Investors can therefore benefit from the EEE tax advantage on the premiums invested and the earnings from ULIP plans in the context of ULIPs as well. Do you want to learn more about the various ULIP tax benefits? Then, let’s look at the specifics. 

How do ULIPs give EEE a competitive edge?

Tax advantages on premium payments 

Subject to the restrictions outlined in Section 80C of the Income Tax Act of 1961, you may deduct the premium you pay for your ULIPs from your gross income.

This deduction is only available if the premium amount is less than or equal to 10% of the capital total assured and is limited to Rs. 1.5 lakh, and can only be claimed (for ULIPs purchased after April 1, 2012).

If the premium for ULIPs purchased before April 1, 2012, is less than or equal to 20% of the capital sum insured, a deduction may be taken. The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.

The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.

Tax advantages for withdrawals 

ULIPs provide partial withdrawal options following the five-year lock-in period. The policyholder is exempt from paying taxes on the amount taken.

Additionally, the amount withdrawn at maturity is tax-free even if the ULIP funds are not partially withdrawn. According to the guidelines in Section 10(10D) of the Income Tax Act of 1961, this is the case. 

The following requirements must be met in order to qualify for this tax exemption: 

  • For ULIPs purchased after April 1, 2012, the annual premium must be less than or equal to 10% of the capital sum insured. 
  • For ULIPs purchased before April 1, 2012, the annual premium shall be less than or equal to 20 percent of the capital sum assured.

Capital gains taxes 

Union Long-Term Capital Gains (LTCG) Tax was introduced in Budget 2018 and is a 10% tax on gains over Rs. 1 lakh in equity investments and equity mutual funds. 

The LTCG tax on ULIPs purchased on or after February 1, 2021, has now been proposed in Budget 2021. This is predicated on the annual aggregate premium for all the ULIPS a person has acquired exceeding Rs 2.5 lakh.

Returns from ULIP plans won’t be tax-free in that situation. It should be noted that top-up premiums will also be taken into account when calculating the annual premiums. You can use a ULIP Calculator to estimate future returns and the value of a ULIP investment. 

Due to this, only ULIPs with annual premiums up to Rs. 2.5 lakh will be eligible for the tax exemption on maturity proceeds, provided that all other requirements under Section 10(10D) of the Income Tax Act are met.

The return on maturity for ULIPs with annual premiums of more than Rs. 2.5 lakh (bought on or after February 1, 2021) will be considered a capital gain and subject to taxation under section 112A of the Income Tax Act, 1961. 

With these advantages, ULIPs are still a profitable investment choice for those who are committed to achieving their life goals on schedule.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.