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ULIP ( Unit Linked Insurance Plan ) – Meaning, Tax Benefits and Comparison

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Yesha Dalwadi

Income Tax
Tax Saving Investment
ULIP
ULIP Benefits

Individual investors are always in search of investment arenas which will provide them with protection against future uncertainties and give high returns. Under ULIP, a portion of your investment is put aside for securing your life and the rest is invested in funds that are equity-oriented or debt-oriented or hybrid. This article will help you understand the various aspects that you need to consider when investing in ULIPS.

What is ULIP?

Unit linked Insurance Plan or ULIP offers a perfect combination that satisfies both these financial concerns. It is a saving scheme that gives the benefit of life insurance protection as well as capital growth. It is the Insurance Regulatory and Development Authority that regulates ULIPS and the lock-in period under this scheme is of 5 years.

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What are the different type of ULIPS?

In India, there are various types of ULIPS that are available which cater to a wide range of audience based on their risk appetite and end investment objective:

ULIP Based on Funds

ULIP Based on Creating Wealth

ULIP Based on the End Use of the Fund

What are the Benefits of Investing in ULIP?

Investing in ULIPS can have many advantages, some of which are as follows:

Income Tax Benefits

Premiums paid towards ULIP are eligible for deduction under section 80C. Although, before the announcement of the Union Budget 2021, ULIP used to fall under the EEE (Exempt, Exempt, Exempt) category. However, the FM proposed certain changes which will affect the taxation of ULIP. Below are the major changes:

Flexibility

In order to deal with the ever-changing market conditions, design of ULIPS takes place in a manner which will prove an option to switch from one type of fund to other at any point in time to meet your changing requirements.  

Long Term Goals

ULIPs have a lock-in period of 5 years hence it helps in achieving long term goals like children’s education, marriage or buying a car or house. Additionally, individuals who invest in ULIP generally invest for a longer period of time in order to reap the benefits of the market.

Comparison of ULIP with ELSS and PPF

Criteria ULIP PPF ELSS
Tax Benefit Deduction can be claimed under section 80C Deduction can be claimed under section 80C plus maturity amount is also exempt The deduction can be claimed under section 80C
Taxation Gains are taxable similar to ELSS None Gains more than INR 1 lakh in a given financial year is taxable under LTCG  @10%
Lock-in period 5 Years 15 Years 3 Years
Risk  Highest among the three Risk-free, as monitored and backed by the government When compared to ULIPS, less risky
Underlying Asset Equity, Debt and Balanced Fixed Income Oriented Equity
Charges

At least these charges will be there: 

Mortality Charge, Premium Allocation Charge, Switching Charge, Surrender Charge, Policy Administration Charge

Only account opening charge of INR 100 Approximately, on an average Expense Ratio which ranges from 1.05% to 2.25%

FAQs

What is the lock in period in ULIP?

The lock in period in Unit linked Insurance Plan is 5 years.

What is the maximum free-lock in period under ULIPs?

If an individual changes his/her mind than usually there is a free lock-in period of 30 days.

Will I be able to shift from equity-oriented funds to any other fund after availing ULIP?

Yes, investors are given the freedom to change from one fund to another at any point of the time.

Is there a penatly if I fail to pay the premium of my ULIP?

Yes, if an individual fails to pay the premium within the first 3 years of the policy, insurance cover is immediately discontinued. For premiums not paid after 3 years, the surrender value is paid and the contract is terminated.

Can I surrender my ULIP at any given point?

Yes, one can surrender their ULIP after paying the surrender charges.

Am I allowed to pay more premium than the pre-decided amount under Regular Premium?

Yes, Top-up facility is provided but it depends on the features of the ULIP scheme that you have availed.

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

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