You might usually receive a relatively low income during your initial working years. However, as your career progresses, you are more likely to receive a hike in your salary. With the rise in your payment, you become eligible to pay more taxes. Although taxes can be an inevitable part of your life, you might pay more than necessary without appropriate financial planning.
Investing in the right tools can help you to reduce your tax liability. Today, the Income Tax Act of 1961 has provisions for saving your taxes. One such investment vehicle, like a Unit Linked Insurance Plan (ULIP), falls under the Exempt-Exempt-Exempt (EEE) category, which allows you to reduce your tax burden and ensures your money’s growth. But what is ULIP? An insurance-investment plan can provide you with the dual benefits of investment and insurance under a single integrated program.
Before you buy a ULIP policy to reduce your tax liability, let’s first decode the complete meaning of EEE instruments:
The EEE is primarily divided into three different categories to allow you to maximize your tax savings and your invested corpus. It is categorized as follows:
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Exempt 1
A part of your annual income can be equally proportionate to your invested amount, which is not taxable.
Exempt 2
The income that you earn while your investment is making returns is not taxable.
Exempt 3
When you withdraw your money from the investments, it can be exempted from the payment of taxes.
You can receive tax benefits since a ULIP investment plan falls under the EEE category. A ULIP plan can be divided into three stages: investment, accumulation, and withdrawal. With a ULIP plan, you can claim tax deductions on all three phases as mentioned below:
Investment stage
When you park your hard-earned savings in a ULIP investment plan, you have to pay the premiums regularly in return for the coverage. As an investor, your premiums can be divided into two parts. While half of the tip can be split toward your coverage, the remaining proportion can be directed toward the ULIP funds. Under Section 80C, your suggestions are eligible for tax deductions. You can claim a tax deduction of up to Rs. 1,50,000 on your taxable income.
Accumulation stage
When you invest in a ULIP plan, your fund value can grow yearly based on the market’s performance. The premium growth can eventually lead to a higher accumulation of your corpus by your ULIP policy reaching the maturity period. The accumulated corpus would be non-taxable. You can grow your corpus and receive loyalty bonuses if you stay invested long.
Withdrawal stage
A ULIP policy is a flexible form of investment. Many life insurance companies allow you to partially withdraw the funds under difficult scenarios such as loss of income, the untimely death of family members, critical illness, etc. Moreover, your nominees can receive the whole amount, called the death benefits, in your absence during the ULIP policy’s maturity. The amount received during an unfortunate event can be tax-free under Section 10(10D).
As highlighted above, a ULIP plan can be one of the most affordable and tax-efficient forms of an investment product. Under the EEE category, you can avail yourself of ULIP tax benefits while building a substantial corpus to fulfill your life goals. In addition, you can ensure maximum flexibility to select different funds, choose the premium payment tenure, and so on, based on your convenience.
