Are you looking for an investment option that offers long-term financial growth along with life coverage? If so, you have probably come across unit-linked insurance plans (ULIPs). The ULIPs have gained immense popularity among young investors in recent years due to their unique features. However, understanding the intricacies of ULIPs, including their meaning and tax benefits, can be a daunting task.

In this article, you will explore ULIP's meaning, latest trends in ULIP investments, types of ULIP plans and ULIP tax benefits associated with these investment instruments.

What are ULIPs?

A ULIP plan is an insurance-cum-investment product that provides policyholders with both life insurance coverage and an opportunity to invest in various market-linked funds. With ULIPs, you can allocate your premium towards different asset classes such as equity, debt, or balanced funds. Now that you know the ULIP meaning, you must know that the returns generated by these funds depend on the performance of the underlying investments.

A ULIP comes in two types based on premium payment frequency: single premium ULIPs and regular premium ULIPs. Single premium ULIPs require a lump-sum payment at the time of investment, while regular premium ULIPs involve periodic payments (monthly, quarterly, biannually, or annually). Regular premium ULIPs offer more flexibility as they allow investors to invest smaller amounts over an extended period.

Types of ULIP Plans

Before you learn about the trends and ULIP tax benefits, you must understand the two main types of ULIP plans available:

Single Premium ULIPs: These plans require a one-time lump-sum payment at the time of investment. They provide convenience for individuals who prefer to make a single upfront payment.

Regular Premium ULIPs: These plans involve regular premium payments at intervals such as monthly, quarterly, biannually, or annually. Regular premium ULIPs offer more flexibility and allow investors to invest smaller amounts over an extended period. They also provide the option to switch funds to take advantage of market fluctuations.

These plans adjust their asset allocation over time to align with an investor's changing risk tolerance. As an investor approaches maturity, these plans become more conservative to safeguard their accumulated wealth.

Latest Trends in ULIP Investment

Some of the latest trends shaping the ULIP investment landscape are:

Return of Mortality Charges (ROMC): The ULIP premiums are divided into two components, with a portion allocated towards providing life insurance coverage. With the introduction of ROMC plans, investors can now receive the mortality charges on maturity. This makes ULIPs more cost-effective, allowing investors to benefit from the return on their investment.

Tax on Capital Gains: Since 2021, ULIP investors need to pay capital gains tax when receiving payouts. If the cumulative premium paid during the policy term exceeds Rs. 2,50,000 for any previous year and the ULIP is held for over 12 months, a 10% tax is levied on gains exceeding Rs. 1 lakh under Section 112A.

For investments held for less than a year where the premium paid exceeds Rs. 2,50,000, a short-term capital gains tax of 15% is applicable under Section 111A. However, in the case of death benefit payouts, no capital gain tax is applicable.

Recent Changes in ULIP Policy: The Insurance Regulatory and Development Authority of India (IRDAI) has implemented several changes to ULIP policies to increase transparency and protect investor interests. These changes include a reduction in maximum charges levied by insurance companies and standardisation of ULIP features and benefits across all companies. Additionally, IRDAI has introduced a new ULIP product called 'Saral Jeevan Bima,' which aims to simplify ULIP plans and make them more accessible.

Tax Benefits of ULIPs

One of the significant advantages of investing is the ULIP tax benefit. Here are some tax benefits associated with ULIP investments:

Tax Deduction Under Section 80C: The premium paid towards a ULIP is eligible for a tax deduction under Section 80C of the Income Tax Act, 1961. As per current tax laws, you can claim a deduction of up to Rs. 1.5 lakh on the premium paid towards your ULIP policy in a financial year.

Tax-Free Maturity Proceeds: The maturity proceeds received from a ULIP are tax-free under Section 10(10D) of the Income Tax Act, provided that the sum assured does not exceed ten times the annual premium paid.

Capital Gains Tax Exemption on Switching Funds: Switching between different investment funds within a ULIP does not attract any capital gains tax liability. This allows investors to reallocate their investments based on market conditions without worrying about tax implications.

Protection Against Wealth Tax: The underlying assets held within a ULIP are exempted from wealth tax as per the provisions of the Wealth Tax Act, 1957.

It is important to note that these tax benefits are subject to changes in tax laws and individual financial circumstances. It is advisable to consult with a tax advisor or financial planner to understand how the tax benefits of ULIPs can be optimised based on your specific requirements.

Conclusion

The ULIPs have emerged as a popular investment option for individuals seeking long-term financial growth along with life coverage. You can make informed decisions about your financial future by understanding the meaning of ULIPs and their associated tax benefits. Remember to carefully evaluate the policy terms and conditions before investing in a ULIP. With the recent trends and changes in ULIP policies, it is crucial to stay updated to maximise the potential of these investment instruments.