During your initial working years, you might usually receive a relatively low income. However, as your career progresses further, you are more likely to receive a hike in your salary. With the rise in your income, you become eligible to pay more taxes. Although taxes can be the inevitable part of your lives, without appropriate financial planning, you might end up paying higher than necessary.
Investing in the right tools can help you to reduce your tax liability. Today, the Income Tax Act, 1961, has made provisions for you to save your taxes. One such investment vehicle like a Unit Linked Insurance Plan (ULIP) falls under the Exempt-Exempt-Exempt (EEE) category that not only allows you to reduce your tax burden but also ensures the growth of your money. But what is ULIP? An insurance-investment plan that can provide you with the dual benefits of investment and insurance under a single integrated plan.
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 categorised as follows:
- 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 earning returns is not taxable.
- Exempt 3
When you withdraw your money from the investments, it can be exempted from the payment of taxes.
Since a ULIP investment plan falls under the EEE category, you can receive tax benefits on your investments. A ULIP plan can be divided into three stages such as the investment, accumulation and withdrawal. With a ULIP plan, you can claim tax deductions on all the 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, the premiums you pay can be typically divided into two parts. While half of the premium can be split towards your coverage, the remaining proportion can be directed towards the ULIP funds. Under Section 80C, your premiums are eligible for tax deductions. You can claim a tax deduction up to Rs. 1,50,000 on your taxable income.
- Accumulation stage
When you invest in a ULIP plan, your fund value can grow every year based on the performance of the market. The growth of premium can eventually lead to higher accumulation of your corpus by the time your ULIP policy reaches the maturity period. The accumulated corpus would be non-taxable. If you stay invested for a long time, you can not only grow your corpus but also receive loyalty bonuses.
- Withdrawal stage
A ULIP policy is a flexible form of investment. Many life insurance companies allow you to withdraw the funds partially under difficult scenarios such as loss of income, the untimely death of family members, critical illness, and so forth. Moreover, your nominees can receive the whole amount called the death benefits in your absence during the maturity of the ULIP policy. 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 as well as a tax-efficient form of an investment product. Under the EEE category, you can avail ULIP tax benefits while you get to build a substantial corpus to fulfil your life goals. In addition to this, you can ensure maximum flexibility to select different funds, choose the premium payment tenure, and so on based on your convenience.