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ULIP - A viable tax saving option


April 07, 2021

By : Bajaj Allianz Life

If you are looking for tax saving options in India, Unit Linked Insurance Plans (ULIPs) are one of the preferred investment instruments available. If you’ve been wondering ‘Why should I invest in ULIP now?’ then it may help to learn all about the ULIP tax exemptions, so you can better understand why these investment plans are one among the many preferred tax saving options available in India.

So, let us take a closer look at the many tax benefits and ULIP tax exemptions you can claim for your ULIP investments under the different sections of the Income Tax Act, 1961.


Tax benefits offered by ULIP plans under the Income Tax Act, 1961


ULIPs, being tax saving options, offer three different kinds of benefits under the Income Tax Act, 1961. Here are the details.


Tax benefits on premiums paid


The premium that you pay for your ULIPs can be claimed as a deduction from your total income, as per section 80C of the Income Tax Act, 1961 and is up to Rs. 1.5 lakhs. If policy is not satisfying the Section 10(10D) conditions, amount of deduction under Section 80C is restricted up to 10% of capital sum assured for policies issued on or after April 1, 2012 and for policies issued before April 1, 2012 amount of deduction is restricted up to 20% of capital sum assured.


Tax benefits on maturity


If the policyholder survives the policy term, the insurer pays out the maturity benefits to the policyholder when the tenure of the plan comes to an end. These benefits are also exempt from tax, as per the provisions of section 10(10D) of the Income Tax Act, 1961. The conditions for availing this tax exemption are as follows:

  • For ULIPs purchased on or after April 1, 2012, the annual premium should be less than or equal to 10 percent of the capital sum assured.
  • For ULIPs purchased before April 1, 2012, the annual premium should be less than or equal to 20 percent of the capital sum assured. It may be noted that top up premium would also be considered for determining annual premium.

In case the policyholder passes away during the tenure of the plan, the death benefits received are tax-free in the hands of the nominee. Note that, Death proceeds will be taxable for the key man policy (Employer employee policy)


Tax on capital gains


Since ULIPs are held for a minimum of 5 years, any gains obtained from these investments are long-term capital gains. Union Budget 2018 introduced the Long-Term Capital Gains (LTCG) tax, wherein gains over Rs. 1 lakh in equity investments and equity mutual funds were to be taxable at 10 percent

Now, Budget 2021 has amended this provision, making the LTCG on ULIPs taxable under certain conditions. For ULIPs purchased on or after February 1, 2021, if the annual premium is more than Rs 2.5 lakh including top up premium, the returns that you will get will no longer be tax-exempt. In other words, the tax exemption on maturity proceeds under Section 10(10D) shall only be available for the ULIPs having an annual premium up to Rs. 2.5 lakh subject to satisfaction conditions as mentioned in Section 10(10D) of Income Tax Act, 1961.

For ULIPs (purchased on or after February 1, 2021) that have an annual premium of more than Rs. 2.5 lakh, the return on maturity shall be treated as capital gain and charged to tax under section 112A of the Income Tax Act, 1961. This is applicable under the assumption that all ULIPs will be treated as equity oriented funds. However further clarity is awaited from the Govt. Ensure to take relevant suggestions from a tax expert or a professional tax consultant before makings any decision.


Other benefits offered by ULIPs


In addition to the ULIP tax exemptions explained above, ULIPs also offer several other benefits. Here is a preview.

  • ULIPs give you the benefits of the power of compounding.
  • They make it possible for investors to earn market-linked returns.
  • They also offer the protection of a life cover.
  • They help you save regularly and systematically.



    Therefore, you have the answer to ‘why should I invest in ULIP now?’ This should help you with your tax planning exercise, so you can reduce the burden of taxation on your income. In addition to this, you also get to enjoy many other benefits from ULIPs.


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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.