7 Things to Know About the Tax Benefits of ULIPs

Nowadays, Unit Linked Insurance Plans, i.e., ULIPs, have evolved as the popular income tax saving investment options in India that help you save tax on paid premiums and maturity amounts. They also play an important role in financial planning. ULIPs not only provide life coverage but also helps in investing your money for fulfilling wealth creation goals. With the help of these plans, you can invest in a combination of debt and equity funds, thus providing good returns.

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Apart from these, you get tax benefits from ULIPs as well. Here is how:

What is ULIP?

  • ULIP is the Unit Linked Insurance Plan, an investment plus insurance tool where the life assured also gets the life cover as part of their investment plan. 

  • One of the unique advantages of ULIP is tax-saving benefits, which can be opted for throughout the policy term and at the time of maturity. 

  • Customers prefer ULIP plans over other available investment options because of their flexibility. 

  • It is considered a consistent option for fulfilling wealth creation goals in the long term. This is because it is a combination of returns, tax savings, and insurance.

7 Things to Know About the ULIP Tax Benefits 

Apart from better returns and short lock-in periods, ULIPs are popular instruments to save tax. Let us understand 7 things about the tax benefits of ULIPs: 

  1. Tax Saving Benefit on ULIPs Paid Premium 

    A policyholder can avail of tax deduction up to Rs.1, 50,000 on the policy premium amounts paid towards the ULIPs under sections 10D and 80C of the Income Tax Act, 1961. Continue your ULIP policy for 5 years and enjoy the exemption on taxes. 

  2. ULIP Tax Benefits for Maturity 

    • ULIP is a market-linked investment plan that offers maturity amounts free of taxes as per the prevailing laws, such as section 10 (10D) of the Income Tax Act of 1961. 

    • To avail of tax benefits on maturity, the premium should be less than 10% of the sum assured if the plans are bought between April 1, 2012, and February 1, 2021.  

    • For people who have purchased plans before April 1, 2012, the maturity amount will be tax-free if the yearly premium is lower than 20% of the sum assured. 

    • For plans bought after February 1, 2021, the total premiums paid should be less than Rs. 2.5 lakh to gain tax exemptions on maturity. 

    • In the case of life assured's death, the death benefit is also free of income tax deductions. 

    It must be noted that as per Government of India (GoI) rules in February 2021, ULIPs are now NOT Exempted from the taxation purview on Long Term Capital Gains (LTCG).

  3. Tax-free Withdrawals in Case of Death 

    In case of the policyholder's unfortunate demise, the family is eligible to receive a sum assured amount along with the returns generated by the ULIP plans. The payout is relieved under Section 10(10D) of the Income Tax. 

  4. Tax Benefits of Partial Withdrawals in a ULIP Plan

    Partial Withdrawals are tax-free in the case of ULIPs. In case of withdrawing money from a ULIP plan after 5 years of the lock-in period, you are not required to pay taxes for those withdrawals. The condition is that the amount of withdrawal will not exceed 20% of the fund amount or value. 

  5. Top-up Deductions 

    ULIP provides an option to increase their investment by purchasing top-ups. These Top-ups are also entitled to income tax deductions under Sections 80C and 10D. 

  6. Long-Time Tax Benefits

    You can enjoy ULIP tax benefits for a long-term investment. The lock-in period is of around five years, and you profit for at least 5 consecutive years by saving tax on your premiums. If you continue with your policy, you can gain more tax benefits toward ULIPs. 

  7. ULIP Offers Investment, Life Cover, and Tax Benefits under a Single Plan

    Unit Linked Insurance Plans are quite beneficial over other traditional insurance plans, PPFs, and mutual funds. Life insurance provides life cover but does not help you create wealth. On the other side, mutual funds offer you good returns but no insurance coverage. In comparison, ULIP plans to create a bridge and provide you with the additional benefit of tax saving.  

Key Features and Benefits of ULIPs 

  1. Offers Insurance Plus Investment Benefits 

    The main objective of a ULIP plan is to provide maximum wealth appreciation on your investment by market-linked tools and returns. These plans also provide wide life coverage benefits to you and your family throughout the policy term. 

  2. Choose and Switch Between Funds 

    ULIPs allow switching between equity and debt funds anytime during the policy tenure. A fixed number of switches are allowed within a financial year without paying any extra payment. It is advisable to refer to the policy brochure and documents to know more about whether your ULIP plan offers free switches. 

  3. Partial Withdrawals 

    Initially, all the ULIP plans have a lock-in period of 5 years. However, a policyholder can select a fixed number of withdrawals from the accrued fund after the lock-in period. You are not required to pay any additional charges. 

  4. Redirection of Premiums 

    While investing in ULIPs, you can redirect your future premiums between the available fund options at any time. You are required to provide the policy number and mention the type of fund to which you are redirecting your premiums. You may also specify the percentage of the premium that is allocated for each type of fund.

Wrapping It Up!

ULIPs provide you with an opportunity to avail yourself of the benefits of tax planning for achieving your wealth creation goals and ensuring your family's future. The plans are flexible, where different fund options are available, and you can switch funds as per your investment objectives or market fluctuations. With ULIPs, you get tax-saving investment benefits and tax-free fund withdrawals at the time of maturity or partial withdrawals.


  • Is ULIP tax-free after 5 years?

    Yes, if an investor surrenders their ULIP policy after the 5-year lock-in period, the total amount to be received will be tax exempted under the Income Tax Act.
  • Does ULIP come under 80D?

    Yes, the life insurance coverage with a health rider plan under a ULIP policy is covered under tax benefits of Section 80D of the IT Act, 1961. 
  • Is ULIP interest tax-free?

    Yes, the interest on investment earned on the maturity of a ULIP plan is tax-free if the total sum of premiums remains under Rest. 2.5 lakhs per year. If the annual premium is more than Rest. 2.5 lakhs, then Capital Gains Tax will be charged on the income earned.
  • Is ULIP single premium tax-free?

    Yes, for an investor with a single-pay premium, amounts are tax-free if the minimum sum assured on the policy is ten times the single premium amount. It must be noticed that a 1% Tax Deduction at Source (TDS) will be deducted in this case. In addition, the maturity amount is tax-free in case of a death claim.
  • Is ULIP better than FD?

    Yes, ULIPs are a better place to invest than FDs if you hold a medium to high risk-taking appetite. ULIPs provide you with a mix of both life insurance coverage and money investment.
    In addition, the flexibility to change your investment portfolio during the plan's tenure makes it an attractive investment option for investors.
  • What are the disadvantages of ULIP?

    The disadvantages of a ULIP plan are as follows:
    • These plans require high initial investment with a long gestation period.
    • Being market-linked, ULIP investments are risk-prone.
    • Fund switching charges are deducted in case of a fund portfolio switch during the policy tenure.
    • The 5-year lock-in period discourages financial liquidity to the individual in case of an emergency.
  • Which is better, ULIP or ELSS?

    The Equity-Linked Savings Scheme (ELSS) is a more attractive investment option for short-term investors due to its short lock-in period of 3 years, which is 5 years in a ULIP plan. During a lock-in period, the investor cannot liquidate his funds in case of any emergency.

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