Understanding ULIP Taxation Advantage

ULIP is one of the most tax efficient financial tools which offers benefit in the combination of insurance and investment.It’s Working structure is designed to provide both life protection and savings opportunity. Part of the contribution made is utilized for providing a life cover while rest of the portion is used for investing in various asset classes like equity, debt and money market. ULIP offers you the flexibility to choose funds based on your risk appetite, investment goal and time horizon. With a wide range of flexible options like partial withdrawal and switches, ULIPs can fit into needs of every investor. Along with potential return, ULIPs offer significant tax benefits too. Let’s look at the various tax benefits-

Tax Benefit on Investment

Premium payment made towards Unit Linked Investment Plans is allowed for tax deductions under Section 80C of the Income Tax Act. The maximum amount of rebate given to investors is Rs. 1.5 lakhs under the Section. Deductions are subjected to certain conditions mentioned below

  • Premium should not be more than 10% of the sum assured. In case, the premium paid is more than 10% of the sum assured, a  tax rebate is given only in the amount equivalent to 10% of sum assured. (For ULIPs purchased post 1st April 2012)

For instance, you have bought ULIP with sum assured Rs. 10 lakh. If premium paid is Rs. 120000 (more than 10% of Rs.10 lakh), then tax deduction is allowed only for Rs. 100000 (10% Rs. 10 lakh).

  • Tax deduction under Section 80C is allowed only if the premium paid is less than 20% of the sum assured. In case, the premium is more than 20%; tax rebate is given only in the amount equivalent to 20% of the sum assured. (For ULIPs purchased before 1st April 2012)

For instance, if a policy with sum assured of Rs. 5 lakh was purchased for a premium of Rs. 1 lakh or less then the entire contribution is allowed for deduction.

  • If the policy is discontinued or surrendered before the lock-in period of 5 years or 3 years (for old ones), deductions claimed in the previous years will be reversed and added back to your taxable income.

Tax Benefits on Fund Switches

ULIP allows the investor to move from one fund option to another based on the investment need, market condition and risk exposure requirement. The investor has a freedom to modify the proportion of investment in various asset classes like equity, debt and money market instruments. Profit generated out of switches is tax-free irrespective of the asset class. Even the returns generated from debt funds are exempted from tax. This makes ULIP a unique investment option.

Tax Benefits on Policy Payouts

ULIP also offers excellent tax benefits at the time of making payouts. However, tax treatments slightly differ based on the type of payout.

  • On Partial Withdrawals: ULIP allows you to make partial withdrawals based on your need for specific life-event. And such eligible payouts do not attract any tax provided below conditions are satisfied.
  • Partial withdrawal has to be made only after completion of the lock-in period
  • Amount of withdrawal cannot be more than 20% of the fund value.
  • On Death: Like any other insurance product, ULIP offers a death benefit. In case of demise of the policyholder, sum assured is paid to the beneficiary or the nominee. Such payouts are completely exempt from income tax as per Section 10 (10D) of the Income Tax Act irrespective of the amount of premium.
  • On Maturity: At the time of policy maturity, sum assured or the fund value whichever is higher is paid out to the policy holder. Maturity payout also is exempted from income tax as per Section 10 (10D) of the Income Tax Act, 1961. However, if the premium for the policy is more than 10% of the sum assured, maturity benefits are added to your taxable income. As per Section 194DA of the Income Tax Act insurer is also allowed to deduct TDS on maturity payouts if the premium exceeds 10% of the sum assured.


To sum it up, ULIPs are one of the best long term investment options that offer life protection, wealth creation and inflation-proof returns along with higher tax efficiency and flexibility. With the unique features, ULIPs is used as an effective investment tool for creation and protection of wealth along with great tax saving advantages.