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How ULIP Tax Benefits Work
Table of Content
ULIPs are designed not only to help you grow your wealth but also to offer significant tax advantages at different stages of the policy, right from investment to maturity and final payouts. Understanding how these benefits are structured can help you make smarter, tax-efficient financial decisions.
Let us now look at how the tax benefits of ULIP plans work:
ULIP Tax Benefits on Premiums Paid
Policyholder can claim deduction of premium paid during the financial year under Section 80C of the Income Tax Act, 1961 subject to the aggregate limit of Rs.1,50,000 and subject to the other conditions stated therein.
For example, if a 30-year-old Mrs. Sharma with an annual income of ₹10 Lakh chooses to invest in a ULIP for 15 years with a ₹1,20,000 premium per year, she is eligible to claim deduction of Rs 1,20,000 under Section 80C
So, her taxable income decreases to ₹10,00,000 - ₹1,20,000 = ₹8,80,000****. If she falls under the 20% tax bracket, she immediately saves ₹1,20,000 x 20% = ₹24,000.
ULIP Tax Benefits on Maturity Amount
According to Section 10(10D) of the Income Tax Act 1961, in case of ULIP policies issued on or after 01-02-2021, maturity proceeds will be exempt from tax if the below conditions are satisfied:
The annual premium paid is less than 10% of the sum assured amount throughout the policy term.
The annual premium payable for any year during the term of policy does not exceeds ₹2.5 Lakh and
Aggregate annual premium should not exceed Rs. 2.5 lakh for all policies held by the policyholder with all life insurers for policies issued on or after February 1, 2021.
For example, Mr. Utpal invested in an ULIP in July 2022. He has chosen a premium amount of ₹2 Lakh per year for a policy term of 15 years. The sum assured amount he chooses is ₹20 Lakh. The total fund value in this case would be ₹38 Lakh.
Now, since the annual premium is less than ₹2.5 Lakh, and his premium amount is 10% of the sum assured amount, his ULIP is eligible for tax-free maturity.
ULIP Tax-Free Life Cover Payouts
In case of ULIP life cover payouts or death benefits as per Section 10(10D) of the Income Tax Act, 1961, the beneficiaries receive the death proceeds from ULIP which shall be completely exempt from tax. Meaning, if the policyholder dies within the ULIP term, the nominee receives the fund value completely tax-free, even if the premium is higher than ₹2.5 Lakh.
For example, Mr. Anshul buys an ULIP in 2023 for a sum assured amount of ₹20 Lakh. He pays the annual premium of ₹3.5 Lakh, which is more than the ₹2.5 Lakh threshold. In case of an unfortunate event, his beneficiaries will receive the whole fund value as a death benefit, exempt from tax.
Key Benefits of ULIPs
Here are the details regarding the key benefits and tax advantages of ULIP plans:
Insurance Plus Investment Benefits
Fund Switching
Partial Withdrawals
Premium Redirection
Tax Benefits
Death Benefit
Unit-linked insurance Plans (ULIPs) come with dual benefits. Unlike term insurance plans that only cover your family’s future, ULIPs provide you with the edge so that you can invest in debt, equity or mutual funds. That way, you get the opportunity to grow your wealth in the long run.
ULIP tax benefits enable you to avail of the market-linked returns. ULIP plans even allow policyholders to switch funds from equity to debt to mutual funds effortlessly, depending on the market performance of the funds and the risk appetite of the policyholder. While switching, there will not be any additional charges or tax impacts.
A specific type of ULIP enables policyholders to partially withdraw money during emergencies. There might be terms and conditions applicable. It is wise to be aware of those terms and conditions before choosing partial withdrawals.
With ULIPs, you can redirect future funds to different funds without affecting the existing investments. For example, if after 3 years of investing in an ULIP (70% on equity and 30% on a debt fund), you decide to choose to swap so that the investment becomes safer, you simply have to notify your insurer that you want 70% of your premium to be invested in debt and 30% in an equity fund.
That way, ULIP investment helps you to stay aligned even when your financial goals and risk tolerance change.
As per the Budget 2021, the tax benefit in ULIP is as follows:
● As per Section 80C premium paid is allowed as deduction subject to the aggregate limit of Rs.1,50,000 and subject to the other conditions stated therein.
● As per Section 10(10D), in case of death benefit, the beneficiaries will receive the full fund value even if the premium is higher than the threshold value.
As per the Budget 2025, the ULIP tax benefit remains the same as it was in Budget 2021. No major changes have been implied – However, a key change brought in by Finance Act, 2025, is that all types of ULIPs are now treated as capital assets if they are not compliant under Section 10(10D)
In case of policyholder’s demise during the policy term, the death benefit under ULIP Plan ensures that the nominee receives full sum assured amount. This amount is completely tax-free and does not attract any tax implications under Income Tax Act, 1961.
Maturity Benefit
If the ULIP policyholders survive the policy term, they will receive the sum insured amount in the form of a maturity benefit. However, there are certain conditions such as:
The premium paid is not in excess of 10% of the actual capital sum assured (i.e. death sum assured) throughout the policy term.
If the premium payable for any year during the term of policy does not exceeds INR 2.5 lakhs and
Aggregate annual premium should not exceed Rs. 2.5 lakh for all policies held by the policyholder with all life insurers for policies issued on or after February 1, 2021.
One of the best ULIP plans for tax benefits is HDFC Life Click2Invest. It helps grow your investments without compromising the financial security of your family. With an annual One of the best ULIP plans for tax benefits is HDFC Life Click2Invest. It helps grow your investments without compromising the financial security of your family. With an annual premium starting from ₹12,000, you can begin your ULIP journey to secure your family and long-term investment.
Conclusion
Since the Union Budget of 2021, there have been some updates regarding Unit Linked Insurance Plans or ULIP taxation in India. Following those updates, the rules of the ULIP tax benefits changed.
However, for those who purchased their ULIPs between April 2012 and February 2021, the returns from ULIPs are tax-free if the annual premium was less than 10% of the sum assured. If you are purchasing a ULIP, ensure that your premium does not exceed the threshold amount of ₹2.5 Lakh. .
Note: If assesses has opted for Old tax regime, assessee shall be eligible to claim deduction under chapter VI-A. If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) are available.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
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Tax benefits & exemptions are subject to the conditions of the Income Tax Act, 1961 and its provisions.
#Tax Laws are subject to change from time to time.
Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.
**** These Figures are for Illustrative Purpose. Actual Figure might differ.
18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime
** The returns mentioned is the 5-year benchmark return percentage of Nifty Alpha 50 index data as of April 30, 2025, and is not indicative returns of HDFC Life’s Top 300 Alpha 50 fund(SFIN:ULIF07828/02/25Alpha300Fd101) Source: https://www.niftyindices.com/Factsheet/Factsheet_Nifty_Alpha50.pdf
In unit linked policies, the investment risk in the investment portfolio is borne by the policyholder. The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year. HDFC Life Click 2 Invest(UIN: 101L178V01) is the name of the Unit linked Non- Participating Individual Savings Life Insurance Plan.
Life Insurance Coverage is available in this product. The unit linked insurance products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender/withdraw the monies invested in unit linked insurance products completely or partially till the end of fifth year. Unit Linked Funds are subject to market risks and there is no assurance or guarantee that the objective of the investment fund will be achieved. The premium shall be adjusted on the due date even if it has been received on advance.
Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. The name of the company, name of the brand and name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.
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