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The Exempt-Exempt-Exempt tax benefit of ULIPs

Unit Linked Insurance Plans (ULIPs) are financial instruments that combine the benefits of insurance and wealth-creation. Moreover, they are tax-saving investments that can help investors reduce their taxable income significantly. Since ULIPs fall under the category of exempt-exempt-exempt (EEE) investments, they’re one of the best options for assessees who do not want to suffer the burden of taxation at any phase of the investment, right from parking the funds in the product to withdrawing it. 

What are exempt-exempt-exempt investments?
Exempt-exempt-exempt instruments are tax-saving investments that offer tax benefits at all the three different stages of investments, as explained here.

  • The investment phase: This phase refers to the point at the beginning of the investment, when you park your funds in the instrument of your choice. The amount invested in the tax-saving venture can generally be claimed as a deduction from the total income.

  • The accumulation phase: Throughout the investment tenure, investments deliver rewards in the form of interest or dividends that accumulate to form a sizeable corpus. The amount of gains accumulated are also exempted from tax.

  • The withdrawal phase: Lastly, at the end of the investment tenure, the corpus that can be withdrawn is paid out to the investor as per the terms of the investment. This lump sum amount received is also not taxable.

How do ULIPs work?
Unit Linked Insurance Plans offer the dual benefit of a protective life cover as well as wealth creation. To invest in Unit Linked Insurance Plans, you’ll be required to pay a premium to the insurer. A portion of this premium goes towards providing you with an insurance cover, while the remaining premium is invested in market-linked instruments.

Throughout the investment tenure, depending on the market conditions, gains are accumulated. At the end of the term, you can withdraw the corpus, which is comprised of the premium invested and the gains earned thereon. Maturity or death benefits may also be paid out, depending on whether or not the investor survives the investment tenure.

How do ULIPs offer exempt-exempt-exempt benefits to investors?
Here’s how ULIPs offer EEE tax benefits to investors.

  • The premium you pay for investing in Unit Linked Insurance Plans is deductible from your total income, as per section 80C. The maximum amount deductible is limited to ₹ 1.5 lakhs.
  • The maturity or death benefits obtained from the insurance component of a ULIP are also exempted from tax, as per the provisions of section 10(10D).
  • Furthermore, the long-term capital gains accumulated from the market-linked investment component are also tax-free. 
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