Investment in ULIPs for tax deductions

Investment in ULIP is eligible for deduction under section 80C (life insurance) or 80CCC (pension) of Income Tax Act. A maximum of Rs 1,50,000 is allowed under section 80C/ 80CCC. ULIP is an integrated product of ‘insurance and investment’ developed and marketed by life insurance companies. ULIP offers investors the advantage of both insurance and investment under a single plan. In this integrated scheme of investment and insurance, a part of the premium paid by the policyholder is utilized for insurance cover, and the rest of the premium portion is utilized for investments in various equity/debt schemes.  The average category return of small and midcap ULIP funds is 16%, which is only slightly lower compared to their mutual fund counterparts. PNB Met Life, AEGON Life Maximise Plan, LIC Endowment Plus Plan, and Bajaj Allianz Future Gain Plan entry age are some of the leading insurance companies having ULIP plans. 

There are different types of ULIPS. They are;

Equity funds – Equity funds  ULIPs utilise the premium paid to invest in equity and equity-related instruments. The performance of these schemes is impacted by market volatility. This scheme is suitable for investors  Accordingly, these ULIPs are suitable for investors with a  goal of capital appreciation and high-risk appetite.

Debt funds – Debt funds invest mostly in fixed-income securities or debt instruments, such as debentures, corporate bonds, government securities, etc. Investors with a goal of the safety of their funds and ready to accept lower returns may invest in this scheme.

Hybrid or balanced funds – Hybrid or balanced funds invest in a combination of equity and fixed-income instruments to generate returns for investors. Such investments are associated with lower risk in comparison to ULIPs that primarily invest in equity.

Cash funds – These ULIPs allocate the collected premium to cash deposits, term deposits, and money market securities. Hence, the risk associated with these plans is the lowest among the other types of ULIPs.

Currently, the investor can expect up to 12%-15% return from his/he investment for the tenure of 10 years depending upon the type of investment.

Now to bring in parity between mutual funds and ULIPs, the Budget 2021 amended the Income Tax Act, 1961, and accordingly, any gains from a ULIP policy shall be treated as capital gains in case the premium paid for any year exceeds Rs 2.5 lakhs. Such policies will now be taxed at 10 percent at maturity.
How it works:

The face value of the ULIP policy is indicated in units. The units of ULIPs are allotted on the basis of the premium paid by the policyholder. These units have Net-Asset-Value (NAV) which is determined by the net rate of returns on money reinvested by funds manager in equity/debt-related instruments.  Investors who are shy to invest in equity-related policies have the option to go for a policy of fully investing in debt funds. The policyholders have the option to switch from one fund to another. They may switch the money from debt funds to equity funds or from equity funds to debt funds at later date. The advantage of the switch facility available to Policyholders of ULIP is that they can switch the funds without the risk of levy of any capital gain tax.

Caution: You must remember that the money invested in ULIPs is associated with market risk. Any loss in the investment made by the fund’s manager is borne by the policyholder. Even a fund that is showing very good performance at present may end with disappointing returns at a future date. Investors who have an appetite for risk could consider the option of investing in ULIPs.