About ULIPs

Best SIP Funds to Invest Online 

INCOME AND GAINS FROM ULIPS ARE TAX FREE

Ulips are insurance plans and therefore, the income and gains are tax free under Section 10(10d). Even short-term gains made by the policyholder by switching from one plan to another are tax free. This gives Ulips a unique edge over mutual funds. In debt funds, short-term gains are taxed at the marginal rate and long-term gains are taxed at 20% after indexation. In equity funds, short-term gains are taxed at 15% and long-term gains beyond ₹1 lakh in a financial year are taxed at 10%. However, the income and gains from the Ulip is tax free only if the cover is 10-times the annual premium. If the premium is more than 10% of the insurance cover, the entire amount received at maturity will be treated as income from other sources and taxed at the marginal rate.

ADEQUATE COVER FOR TAX BENEFITS

The premium you pay is eligible for tax deduction under Section 80C. Here again, this benefit is available only if the cover is 10 times the annualised premium. If the premium is more than 10% of the sum assured the tax deduction is allowed on the amount equal to 10% of the sum assured. This threshold was set six years ago. The rules are a little lenient for those suffering from specified illnesses or disabilities. In their case, the premium should not be more than 15% of the insurance cover. The minimum insurance cover rules do not apply to the death benefit. The insurance money received by the nominee on death of the policyholder will be tax free in all circumstances.

NO TAX SOP IF SURRENDERED PREMATURELY

A Ulip must be continued for at least five years if you want to claim the tax benefits. If the policyholder terminates the Ulip before the completion of five years, the tax deduction availed till then will be reversed. This means the entire deduction claimed on the Ulip premium will be added to the income of the policyholder in the year in which the policy is discontinued. If policy is terminated after completion of five years, the surrender value will be tax free.

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