ULIP Tax Benefits

Table of Content

1. How ULIP Tax Benefits Work?

2. Top ULIP Tax Benefits

3. Key Benefits of ULIPs

4. Frequently Asked Questions (FAQs) on ULIP Tax Benefits

ULIP tax benefits refer to the financial advantages you receive under the Income Tax Act, 1961 when you invest in a Unit Linked Insurance Plan. These benefits help you lower your taxable income through premium deductions under Section 80C where deduction is claimed upto ₹1.5 lakh per year and offer tax-free maturity proceeds under Section 10(10D)¹, provided the policy meets the required conditions like the total aggregate premiums should not exceed ₹2.5 lakh per financial year and the premium amount should not exceed 10% of the sum assured as per the Income Tax Act, 1961. Death proceeds remain tax-free.

Together, these ULIP plan tax benefits1 allow you to build wealth, enjoy life insurance cover, and plan taxes efficiently within a single product.

How ULIP Tax Benefits Work?

ULIPs work as hybrid financial products that blend market-linked investment with life insurance, and this combination makes them eligible for multiple ULIP tax benefits.

The way these benefits function is simple: the premiums you invest can reduce your taxable income, the money accumulated in your fund grows without yearly tax deductions, and the payouts at maturity or in the event of death can be exempt from tax when the policy meets the required conditions.

Together, these features create a tax-efficient structure that rewards long-term, disciplined investing. By staying invested through the whole policy term, you can maximise both the growth potential of the fund and the tax advantages attached to the plan.

Top ULIP Tax Benefits

Top ULIP tax benefits make such plans enticing for the ones looking out to save tax while building wealth over the long term and securing life protection in a single investment.

ULIP Tax Benefits on Premiums Paid [Section 80C]

Premiums paid towards a ULIP plan qualify for tax deductions as per Section 80C of the Income Tax Act, 1961¹. You can claim an amount of up to over all ceiling limit of ₹1.5 lakh in a financial year, which also includes other eligible 80C¹ investments such as Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF) or life insurance premiums. This tax deduction directly brings down your taxable income, which assists you in lowering your yearly tax outflow while continuing to save over the long-term period.

Example:

Consider a 32-year-old policyholder earning ₹10 lakh annually and paying a ULIP premium of ₹1.5 lakh.

• Gross taxable income is equal to ₹10 lakh
• Less: Section 80C¹ deduction (ULIP premium), i.e., ₹1.50 lakh
• New taxable income equal ₹8.50 lakh

If the person falls under the tax bracket of 20%, then the tax saved is:

• 20 per cent of ₹1.50 lakh, which is ₹30,000 saved in taxes for the year.

Such ULIP tax benefits endow annual tax relief and encourage consistent investment over the long-term period through disciplined premium payments.

ULIP Tax Benefits on Maturity Amount [Section 10(10D)]

Proceeds of ULIP maturity are free of tax as per Section 10(10D)¹, provided the policy meets specific eligibility parameters. Such rules make sure that just genuine insurance-cum-investment plans get tax advantages while preventing misuse through high-premium ULIPs.

Eligibility conditions for tax-free maturity (For policies issued after 1st February 2021):

• The annual premium must be below 10% of the sum assured..
• The total aggregate premium for all the policies must not surpass the threshold of ₹2.5 lakh in a financial year.

Eligibility conditions for tax-free maturity (For policies issued before 1st February 2021):

• The annual premium for the policy must be below 10% of the sum assured.

Eligibility conditions for tax-free maturity (For policies issued before 1st April 2012):

• The annual premium for the policy must be below 20% of the sum assured.

Example:

A 35-year-old pays ₹1.2 lakh on an annual basis for a 20-year ULIP with a sum assured of ₹15 lakh. The premium is less than 10% of the sum assured and well within the threshold of the ₹2.5 lakh limit. At the time of maturity, if the fund value rises to a sum of ₹22 lakh, the whole amount becomes eligible for tax-free treatment as per Section 10(10D) (provided all terms are met).

ULIP Tax-Free Life Cover Payouts

If a policyholder withdraws a sum of ₹50,000 from a ULIP with a fund value of ₹8 lakh post the lock-in, and the policy meets all tax-exemption rules, the withdrawal is entirely tax-free, while the remaining balance continues to grow.

Example:

If a policyholder makes a payment of an amount equal to ₹3 lakh on an annual basis for a ULIP plan with a sum assured equal to ₹40 lakh, and the nominee gets the complete amount, then the whole ₹40 lakh payout becomes tax-free.

This makes ULIPs a reliable financial instrument for financial protection over the long term, combining investment growth with assured tax-free security for loved ones.

ULIP Tax Benefits on Partial Withdrawals

ULIPs allow partial withdrawals after the mandatory 5-year lock-in period, giving policyholders flexible access to their money. Such withdrawals can be free of tax if the policy continues and the conditions as per Section 10(10D)¹of the Income Tax Act, 1961 are met, including premium limits as well as the required sum-assured ratio.

Example:

Suppose a policyholder withdraws a sum of ₹50,000 from a ULIP with a fund value equalling ₹8 lakh post the lock-in. And the policy meets all tax-exemption rules; the withdrawal is free of tax while the remaining balance continues to grow.

ULIP Tax Benefits on Investment Growth and Fund Switches

The investment portion of a ULIP grows tax-deferred, meaning the returns earned every year are not taxed on an annual basis. This helps the fund benefit from uninterrupted compounding over the extended time period. This tax benefit applies to all equity, debt, and hybrid funds within the plan.

Another essential benefit offered is the ability to switch between such funds without triggering any tax. No matter whether you are shifting from equity to debt in the course of volatile markets or reallocating to equity for growth purposes, these switches stay tax-free.

Together, tax-deferred growth and tax-free switches assist in maximising returns while keeping the total investment strategy flexible as well as efficient.

Key Benefits of ULIPs

ULIPs bring together life insurance, market-associated investment and tax efficiency in a single plan. They assist individuals in clubbing well their wealth creation over the long term with financial protection. The sections that follow break down each benefit in simple and easy terms.

Insurance Plus Investment Benefits

ULIPs offer the benefit of life insurance protection along with investment options across equity, debt and balanced funds. A portion of your premium goes toward life cover. The rest is invested to generate market-associated returns. This dual structure allows you to work toward financial goals with long-term investment time frames while maintaining the security of your family. This makes ULIPs prudent for those looking to build wealth as well as stay protected under one plan.

Fund Switching

With ULIPs, you can easily make the switch between equity, debt, and balanced funds based on market scenarios or your changing risk appetite level. Such fund switches come without any immediate tax impact, which gives you complete freedom to rebalance your portfolio as needed. Most insurers even offer several free switches every year. This allows you to fine-tune your investment strategy as well as remain in line with your goals.

Partial Withdrawals

Post completion of the mandatory lock-in, ULIPs permit partial withdrawals to meet unanticipated financial requirements/priorities. Such withdrawals are tax-exempt if the policy qualifies as per Section 10(10D) of the Income Tax Act, 1961¹. Insurers might specify limits on the withdrawal amount or minimum fund value. But this feature ensures liquidity with zero need to surrender the policy.

Premium Redirection

Premium redirection permits you to change how your future premiums are distributed across distinct funds. Your prevailing fund value stays intact, while upcoming premiums follow the newly selected allocation. This feature assists you in adjusting your investment approach as your life goals evolve or your risk tolerance level changes, which supports smoother investment portfolio management over the long term.

Tax Benefits

ULIP premiums qualify for tax deductions as per Section 80C of the Income Tax Act, 1961 up to total ceiling limit of ₹1.50 lakh per financial year, subject to meeting specific criteria. The death benefit is completely exempt from tax as per Section 10(10D) of the Income Tax Act, 1961. As per the present rules, after the Budget 2025, ULIPs that do not mitigate the 10(10D)¹ conditions as per the Income Tax Act, 1961 are treated as capital assets, and their gains might be taxed under the head of “Income from Capital Gains” as LTCG under Section 112A at the rate of 12.5% for the total gains exceeding 1.25 lakh. Being aware of these rules assists you in planning premiums well and maturity expectations prudently.

Death Benefit

ULIPs endow a tax-free death benefit to nominees as per Section 10(10D)¹ of the Income Tax Act, 1961, which provides crucial financial protection. If anything unfortunate happens to you, then your family members get whichever amount is higher, i.e., the fund value or the sum assured.

This way, even if the market is going through a rough patch, your loved and dear ones still get solid financial support. It is this built-in protection that makes ULIPs a prudent mix of security and wealth over the long-term period.

Maturity Benefit

Maturity proceeds from a ULIP are totally exempt from tax when the policy is able to meet the conditions as per Section 10(10D)¹ of the Income Tax Act, 1961 The conditions are the annual premiums should not exceed 10% of the sum assured and the total aggregate premium should not exceed 2.5 lakh per financial year for policies issued on or after 1st February 2021. Policies that fail to meet such conditions are taxed as per capital assets as per Section 112A of the Income Tax Act, 1961 at the rate of 12.5% for the gains not exceeding 1.25 lakh. However, compliant plans permit long-term wealth to grow under favourable tax treatment.

Conclusion

ULIPs endow a prudent mix of tax-saving opportunities plus financial growth over the long-term period. Premiums qualify for tax deductions as per Section 80C, and the compliant policies make the most out of tax-free maturity proceeds and exempt death benefits as per Section 10(10D)¹. Such benefits are based on meeting certain conditions, i.e., remaining within the yearly premium limits, maintaining the required premium-to-sum-assured ratio and following the rules of Section 10(10D)¹ as per the Income Tax Act, 1961

Features such as partial withdrawals as well as fund switches even support tax efficiency when the policy meets the required conditions. However, non-compliant ULIPs are looked upon as capital assets. They might attract capital gains tax. To make the most out of ULIP tax benefits, it is a must to plan out premiums in a prudent way, remain compliant, and invest for the long-term period.

Frequently Asked Questions (FAQs) on ULIP Tax Benefits

1. Is ULIP exempt from tax?

A ULIP can be exempt from tax if it meets specific parameters as per Section 10(10D) of the Income Tax Act, 1961. Premiums qualify for tax deductions as per Section 80C¹ upto overall ceiling limit of 1.5 lakh per financial year. Maturity benefits can even be free of tax when the premium-to-sum-assured ratio and yearly premium limits are met. When such conditions are met, then a ULIP endows tax-efficient protection and wealth creation over the long term. Death Benefits under Section 10(10D) still remain tax free.

2. Is ULIP above ₹2.5 lakh taxable?

Yes. For ULIPs that are issued on or post 1st February 2021, and if the annual premium surpasses a sum of ₹2.5 lakh, then the policy no longer qualifies for maturity and is tax-free as per Section 10(10D) of the Income Tax Act, 1961 under the head “Income from Capital Gains”¹. Such plans are looked upon as capital assets, and the gains are taxed as capital gains. However, the death benefit remains completely tax-exempt irrespective of the premium amount.

3. Is ULIP tax-free after 5 years?

A ULIP does not become tax-free post five years automatically. The tax outcome depends on whether the policy follows Section 10(10D)¹ conditions. If the premium remains within the eligible limits, then the maturity proceeds, as well as partial withdrawals post the lock-in, can be tax-free. If not, then the returns might be taxed even after the completion of the five-year period.

4. Is the maturity amount received from a ULIP tax-free?

The maturity amount is free of tax when the policy meets Section 10(10D)¹ conditions as per the Income Tax Act, 1961. This includes the 10 per cent premium-to-sum-assured rule and the ₹2.5 lakh premium threshold for newer ULIPs. If such conditions are not met, then the maturity proceeds are taxed as capital gains. However, policies that comply offer a complete tax exemption on maturity.

5. Are death benefits from ULIPs taxable?

No. Death benefits under ULIPs are exempt from tax under Section 10(10D) of the Income Tax Act, 1961¹. This is regardless of the premium amount or if the policy meets the maturity-linked premium thresholds. The nominee receives the payout, sum assured/fund value, whichever is higher, without any tax, ensuring prudent financial support in the course of uncertain times.

6. Are fund switches within ULIP taxable?

Fund switches within a ULIP plan are not taxable under current ULIP tax rules. You can make the shift of your investment between equity, debt and balanced funds without triggering tax liability. As such, switches take place within the same insurance; they are counted as internal portfolio adjustments. This assists you in reacting to market changes while keeping your investment tax-efficient.

Related Article

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• ULIP Plans for NRI
• Tax on ULIP Maturity