Purchase a ULIP plan to meet your quota for deductions


A ULIP plan can fulfill the goal of wealth creation along with life cover where a good portion of your investment will be put towards life insurance and rest into a fund that is based on equity or debt or both and matches your long-term goals. To achieve those goals it is necessary to invest in a well-thought-out investment option that can boost your income too. Investing in a ULIP plan is quite beneficial if it is purchased quite early in the financial year.

What is ULIP plan?

A ULIP plan is a life insurance policy that offers risk cover for the insured together with investment options to invest in some qualified investments like mutual funds, bonds and stocks. Moreover, with ULIPs, you can select the type of fund and where you want your premium to be invested.

Types of ULIPs

The following are some of the top-performing ULIP fund types.

Equity Funds

This ULIPs investment is primarily available in company stocks and equities and is considered to be a risky investment. These kinds of high-risk investments are suitable for investors with a high-risk appetite. As a rule of thumb, it follows a high risk, high reward approach.

Income, and Bond Funds

As these ULIP funds are invested in fixed income instruments, government securities, and corporate bonds, they offer medium risk and reward.

Balanced or Asset Allocation Funds

This option is one of the most stable ULIPs combine with equity investment with fixed interest instruments. The total investible amount is distributed between high-risk equities, such as company stocks, and lower-risk, fixed-income instruments.

Cash Funds

Cash funds are also known as money market funds or liquid funds, investments in these ULIPs will see your funds directed towards low-risk money and short-term market instruments, such as cash and bank deposits, treasury bills and commercial paper.

ULIP Tax Benefits

The amount invested in ULIP is available for tax deductions. This follows from the income tax provision that ‘any sum paid to keep in force’ a life insurance policy can be claimed as a deduction. Hence, you can even include the extra components like service tax, etc., that have been paid to the insurer. The two key provisions of the Indian IT Act that are applicable here are the Section 80C in which it states that the life insurance premium is exempt from tax and section 80CCC states that the amount paid towards pension plans is tax-exempt. Based on these provisions, an exemption of up to Rs. 1,50,000* is allowed under section 80C and section 80CCC in a financial year. This means that you can invest a higher amount and the total available deduction is capped at Rs. 1,50,000* per annum. Moreover, the yearly premium should be less than 10% of the sum assured offered by the ULIP. Hence, if the sum assured is Rs. 15 lacs and the yearly premium is less than Rs. 1.5 lacs, the entire amount is available for a tax deduction.

To claim tax deductions, the ULIP must remain active for at least two years. Also, if the ULIP is discontinued during the second year, the benefits availed in the first year will get withdrawn too. So, you need to ensure that you have a long-term investment plan and continue to pay the premiums for the entire policy term.