Maximising Your ULIP Returns: Tax Benefits Explained

A Unit Linked Insurance Plan (ULIP) has become an attractive investment option for many Indians because it provides more than life insurance coverage and market-linked returns. We’re talking about the savings earned through tax exemptions and deductions. 

This blog details the different tax implications of ULIPs and practical ways to maximise ULIP returns. You can use this information to plan your investments strategically for maximum savings and returns. 

Understanding ULIP

Unit Linked Insurance Plan (ULIP) is a hybrid financial product that combines the benefits of Investment Plans and Protection Plans. It is designed to provide market-linked returns to policyholders while securing them and their family members under life insurance coverage.

Besides providing dual benefits of higher earning potential and stable life coverage, it stands out for its flexibility. For instance, if you have purchased our Shriram Life Wealth Pro Plan (UIN: 128L096V01), you can enjoy easy access to your funds through partial withdrawals after the first five years.

You also receive free fund switching, auto transfer, and premium redirection to maximise earnings. When you pay policy premiums, a portion goes towards providing life coverage, while the balance is invested in market securities for higher financial growth. Their tax savings component also deserves special mention, so let’s explore it in the following section.    

Tax Benefits of ULIP 

Section 80C

Premiums paid on ULIPs can be deducted u/s 80C, providing immediate tax savings. However, policyholders can only deduct up to ₹ 1.5 lakh/annum. You can use our income tax calculator to gain clarity on your savings.   

Section 10(10D)

Section 10(10D) lists tax exemption rules that determine whether maturity proceeds will be taxable. According to this section, maturity proceeds won’t be taxable on policies issued on or after 1st February 2021 if the premium paid doesn’t exceed ₹ 2.5 lakh or 10% of the policy value for any policy year. These tax implications can significantly increase your investment returns.   

Section 45

One of the biggest ULIP tax benefits is that it doesn’t attract taxes on fund switching. Policyholders can use this clause to repeatedly rebalance their portfolios without triggering a taxable event, maximising ULIP returns.   

Maximising Your ULIP Returns

Strategies for Maximising Returns

While there are numerous ways to maximise ULIP returns, you should consider using its tax-free switching feature to move between equity, debt, or balanced funds based on market trends or your risk tolerance. 

For example, switching to equity in bullish markets and shifting to debt funds during volatile periods can help you earn stable returns without overexposing your investments to market risks.

You can also plan your ULIP investments strategically to enjoy the maximum tax savings. We have covered it in the previous section, so use it in your financial planning to gain a tax advantage. 

We also encourage policyholders to track fund performance and make relevant adjustments for growth regularly. 

Choosing the Right ULIP Plan

Not all ULIPs are created equal, so choose a plan that aligns with your financial goals, budget, and risk profile. You may explore the Shriram Life Growth Plus Plan (UIN: 128L066V03) if you prioritise wealth creation while financially securing your family for challenging times. 

In addition to life coverage and market-linked returns, it provides loyalty benefits, multiple fund classes and investment schemes to help policyholders earn more, free fund switching, etc. 

If you have a low-risk profile, consider adding one of our Savings Plans or Child Plans to your portfolio to complement or balance ULIP investments. 

Long-Term Investment Horizon

ULIPs are not designed for short-term gains. Most of these plans feature a lock-in period, generally five years, and the market-linked returns make them most effective over 10 or 15 years or higher to generate substantial returns. 

Hence, anyone who plans on maximising ULIP returns should treat it as a long-term investment.

Case Study

Rohan, a 35-year salaried individual in the 30% tax bracket, invested in the Shriram Life Golden Jubilee Plan (UIN 128L095V01). Since his priority was accumulating wealth for a secure retirement and he had a moderate to high-risk tolerance, he chose a 20-year policy tenure and paid ₹ 75,000 as a yearly premium.     

With additional investments including ₹10,000/year towards the Public Provident Fund (PPF), ₹ 25,000 for a National Savings Certificate, and ₹ 18,000 for Sukanya Samriddhi Yojana, he utilised full tax benefits u/s 80C. 

It helped him save approximately ₹ 22,500 (75,000*30%) on ULIP premium payments alone, increasing his overall savings. 

Common Mistakes to Avoid 

Anyone purchasing ULIPs post 1st February 2021 should remember that tax exemptions u/s 10(10D) are only valid if the premium payments don’t exceed ₹2.5 lakh or 10% of the policy value in any year, so invest accordingly. 

We encourage individuals to treat ULIPs as long-term investments and utilise the unlimited free fund-switching option and available tax implications for maximising ULIP returns. 

Expert Recommendations

Whether you’re new to investing or a seasoned investor, we encourage everyone to keep their risk tolerance and financial goals at the centre of every investment decision. 

You should also focus on investing early and staying invested longer to enjoy greater returns through the power of compounding. Frequent reviews and rebalancing are recommended for achieving stable financial growth and substantial investment returns. 

Conclusion

Unit Linked Insurance Plan (ULIP) isn’t a regular financial product, but a strategic tool designed to provide multiple benefits in one product. Besides flexibility, life insurance coverage, and market-linked growth, it also provides substantial tax savings when utilised correctly. 

You can use the information shared above to maximising ULIP returns and ULIP tax benefits. If you’re looking for good ULIPs, Shriram Life Insurance provides numerous ULIPs designed to achieve diverse financial goals.