by ULIPs for Tax Saving: Are They Worth It Before March 31?
As the financial year draws to a close, many individuals scramble to finalize their tax-saving investments. Among the various options available, Unit Linked Insurance Plans (ULIPs) stand out for their dual benefits of insurance and investment. But are ULIPs really worth considering over other popular tax-saving instruments like Equity Linked Savings Schemes (ELSS) or Fixed Deposits (FDs)? Let’s dive into a detailed comparison and explore whether ULIPs can be your go-to choice for tax saving.
What Are ULIPs?
ULIPs combine life insurance with investment opportunities. A portion of your premium goes towards life insurance coverage, while the rest is invested in market-linked funds like equity, debt, or hybrid funds. ULIPs also offer tax benefits under Sections 80C and 10(10D) of the Income Tax Act.
Tax Benefits of ULIPs
- Premium Deductions: Under Section 80C, you can claim deductions up to ₹1.5 lakh annually on premiums paid.
- Tax-Free Maturity: The maturity amount is exempt under Section 10(10D), provided certain conditions are met (e.g., premiums paid do not exceed ₹2.5 lakh annually for policies issued after February 1, 2021).
- Life Cover Payouts: In case of the policyholder’s demise, the life cover payout to nominees is tax-free.
- Long-Term Savings: ULIPs have a five-year lock-in period, encouraging disciplined savings while offering tax benefits.
Taxation Changes Introduced in Budget 2025
The Union Budget 2025 introduced significant amendments to the taxation of ULIPs:
- Reclassification as Capital Assets: ULIPs that do not qualify for exemption under Section 10(10D) of the Income Tax Act are now explicitly classified as capital assets. This change ensures uniformity in their tax treatment with other capital market investments. Tax exemption under Section 10(10D) continues for ULIPs with annual premiums below ₹2.5 lakh.
- Taxation of Gains: Profits from redeeming non-exempt ULIPs are now taxed as capital gains under Section 45(1B). Specifically, ULIPs with annual premiums exceeding ₹2.5 lakh will face a 12.5% tax on gains if held for more than one year.
- Tax Rate: If ULIP was redeemed (Non-Exempt):
- > Long-Term Capital Gains (LTCG): Gains from ULIPs held for more than 12 months were taxed at 10% under Section 112A.
- > Short-Term Capital Gains (STCG): Gains from ULIPs held for less than 12 months were taxed at 15%.
- Alignment with Equity-Oriented Funds: Non-exempt ULIPs are now included under the definition of equity-oriented funds as per Clause (a) of the Explanation to Section 112A. This means they are subject to capital gains taxation at rates applicable to equity investments.
ULIP vs ELSS vs Fixed Deposits
Here’s a quick comparison to understand how ULIPs stack up against ELSS and FDs:
| Feature | ULIP | ELSS | Fixed Deposits |
|---|---|---|---|
| Purpose | Insurance + Investment | Pure Investment | Fixed Income Savings |
| Lock-in Period | 5 years | 3 years | 5 years |
| Tax Benefits | Section 80C & 10(10D) | Section 80C | Section 80C |
| Returns | Market-linked | Market-linked | Fixed (lower returns) |
| Flexibility | Fund switching allowed | No switching allowed | No flexibility |
| Risk Level | Moderate to High | High | Low |
Advantages of ULIPs
- Dual Benefits: Combines life insurance with investment.
- Flexibility: Allows fund switching between equity, debt, or hybrid funds.
- Tax Efficiency: Offers long-term tax benefits on both premiums and maturity proceeds.
- Goal-Based Planning: Ideal for long-term financial goals like child education or retirement.
Disadvantages of ULIPs
- High Charges: Includes mortality charges, fund management fees, and administrative costs.
- Market Risk: Returns depend on fund performance and are not guaranteed.
- Long Lock-In Period: Money is locked for five years, limiting liquidity.
Real-Life Example
Imagine Priya, a working professional who wants to save taxes while planning for her child’s education. She invests ₹50,000 annually in a ULIP plan that offers life insurance and allocates funds to equity markets. After five years, Priya enjoys tax-free maturity proceeds while securing her child’s future.
A Personal Scenario
Consider Ramesh, a 35-year-old professional with a young family. He seeks an investment that not only provides tax benefits but also ensures financial security for his loved ones. A ULIP offers him life insurance coverage alongside investment growth, aligning with his dual objectives. Conversely, his friend Sita, aiming solely for tax-efficient high returns and comfortable with market risks, opts for ELSS funds. Meanwhile, their colleague Anil, preferring capital protection, chooses Tax-Saving FDs despite lower returns.
Conclusion
ULIPs can be a powerful tax-saving tool if you’re looking for a mix of insurance and investment with long-term benefits. However, they may not suit everyone due to higher charges and market risks. If you prefer pure investments with shorter lock-in periods, ELSS might be better. For risk-averse individuals seeking guaranteed returns, FDs are more suitable.
ULIPs are worth considering before March 31 if you have clear financial goals and can commit to long-term investments.
Each tax-saving instrument caters to different investor profiles:
- ULIPs: Suitable for those seeking a combination of insurance and investment, with a moderate to long-term horizon.
- ELSS: Ideal for investors aiming for higher returns and willing to accept market volatility over a shorter lock-in period.
- Tax-Saving FDs: Best for conservative investors prioritizing capital protection and assured returns.
The recent taxation changes necessitate a reassessment of ULIPs as a tax-saving instrument:
- For High-Premium Policies: If your annual premium exceeds ₹2.5 lakh, be prepared for capital gains taxation on maturity proceeds.
- For Moderate-Premium Policies: ULIPs can still offer tax benefits under Section 10(10D) if they meet the specified conditions.
Assess your financial goals, risk tolerance, and investment horizon to select the instrument that best suits your needs.
Axis Max Life Flexi Wealth Plus Plan: A Closer Look
As a registered insurance agent with Axis Max Life, it’s essential to understand and convey the features of our ULIP offerings. One notable product is the Axis Max Life Flexi Wealth Plus Plan.
Key Features:
- Comprehensive Coverage: Provides life insurance protection alongside investment opportunities.
- Flexible Investment Options: Offers a choice of 17 fund options and 5 investment strategies, allowing customization based on individual risk appetite and financial goals.
- Wealth Enhancements: Includes Guaranteed Loyalty Additions and Guaranteed Wealth Boosters to enhance fund value over time.
- Return of Mortality Charges: Refunds the cost of insurance upon policy maturity, maximizing the investment component.
- Partial Withdrawals: Allows partial withdrawals after a 5-year lock-in period, offering liquidity to address unforeseen financial needs.
FAQs
- Are ULIP returns guaranteed?
No, ULIP returns depend on market performance and fund allocation. - Can I switch funds in ULIPs?
Yes, most ULIP plans allow fund switching between equity, debt, or hybrid funds. - What happens if I stop paying premiums?
The policy may lapse or convert into a paid-up policy depending on the terms. - Is ULIP better than ELSS?
ULIP offers insurance along with investment but has higher charges compared to ELSS. ELSS is purely an investment product with shorter lock-in periods. - What is the minimum premium for ULIPs?
Premiums vary by plan but typically start at ₹12,000 annually. - How are ULIPs taxed under the new regulations?
- ULIPs with annual premiums exceeding ₹2.5 lakh are now classified as capital assets, and profits from their redemption are taxed as capital gains.
- Do these tax changes affect existing ULIP policies?
- Yes, the amendments apply to both new and existing ULIP policies that do not qualify for exemption under Section 10(10D).
- Are maturity proceeds from ULIPs still tax-free?
- Maturity proceeds from ULIPs are tax-free under Section 10(10D) if the annual premium does not exceed ₹2.5 lakh and other specified conditions are met.
- How does the new 12.5% tax rate apply to ULIPs?
- ULIPs with annual premiums over ₹2.5 lakh will face a 12.5% tax on gains if held for more than one year.
- Should I consider other tax-saving instruments over ULIPs now?
- Given the new tax implications, it’s advisable to evaluate other instruments like ELSS and Tax-Saving FDs, considering factors like lock-in period, returns, risk profile, and tax treatment.
“You are never too old to set another goal or to dream a new dream.” – C.S. Lewis
