ULIP Tax Benefits – One Of The Best Tax Saving Instruments

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Why are ULIPs One of the Best Tax Saving Instruments?

A market-linked plan known as a ULIP provides the possibility of wealth building and tax advantages upon maturity. Read on to see why ULIPs are among the best tools for reducing taxes.

  • Nov 17, 2022

A Unit-Linked Insurance Plan, more commonly known as a ULIP, is a life insurance product. Compared to traditional life insurance tools, such as term insurance plans that offer only life insurance protection, or high-risk investment avenues like mutual funds that provide only the opportunity to create wealth, ULIP is a market-linked plan that offers the opportunity for wealth creation along with insurance and superior tax-benefits.

Moreover, ULIP is a life insurance product that can be considered more reliable. It is one of the best wealth-creation tools for long-term investment, given the benefits of ULIP taxation, protection & security, and the returns all in one insurance product. Not only that, it gives you options to invest while offering the benefit of life insurance alongside. But, the ULIPs tax benefits are a key feature, which makes it a special one.

Among various investor-friendly features that ULIPs offer, a very interesting and unique proposition is the ability to invest a portion of the policy premium in a debt-equity mix that, too, in varying amounts. This enables the policyholder to make inter-fund transfers through the ULIPs fund switching capability without additional ULIP tax liabilities. This means that you can invest your money into debts or equities in any proportion you wish to and then manipulate the investment amount using the ULIPs switch feature.

5 Tax Benefits of ULIPs

1. The premiums paid towards a ULIP are eligible for tax deductions

The premium paid towards a ULIP qualifies for a tax deduction of up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961. However, this deduction is applicable only if the premium is less than 10% of the sum assured of the plan. For premiums beyond 10%, the deduction amount is still capped at 10%. So, for instance, if the premium you pay under a policy is ₹3,00,000 for a sum assured of ₹15,00,000, the deduction amount will be limited to ₹1,50,000. Additionally, you must note that, as there is a lock-in period of 5 years on ULIP policies, you will be directly saving taxes through ULIP tax exemption benefits.

2. ULIP offers tax benefits on maturity

Maturity refers to completing your policy. Under a ULIP, you get the sum assured or the entire value of the unit-linked investments (whichever is higher) at maturity. This payout is exempted from tax under Section 10(10D) of the Income Tax Act, 1961. The premium amount must be limited to 10% of the sum assured value.

3. You can make tax-free partial withdrawals under a ULIP

You can make tax-free partial withdrawals after completing the mandatory lock-in period of 5 years of your ULIP. However, the withdrawal amount cannot exceed 20% of the total sum assured value. This helps avoid tax and allows you to make partial withdrawals for different financial needs, such as marriage, a child’s education, retirement, home purchase, etc. Hence, you have the freedom to withdraw funds from time to time.

4. The death benefit payable under a ULIP is exempt from tax

The death benefit of a ULIP that is payable to your nominee/family members is not taxable. This benefit includes the total sum assured and the returns generated through market-linked investments under the plan.

5. Any top-ups made under an existing ULIP plan are eligible for tax deductions

With a ULIP, you can make top-up investments or cash additions after the 5-year lock-in period. These top-ups are eligible for tax deductions under Section 80C and Section 10(10) D of the Income Tax Act, 1961. However, the premium amount must not exceed 10% of the sum assured.

6. Long-term tax benefits

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7. ULIP offers investment, life cover and other tax benefits under a single plan

Compared to mutual funds, PPFs, and other standard insurance plans, unit-linked insurance plans provide several advantages. Although it provides life insurance, it does not assist in wealth creation. Mutual funds, on the other hand, give you good returns but no insurance. ULIP plans, however, provide a bridge and an additional benefit of tax savings.


ULIP is a perfect bridge between high-risk assets like mutual funds and simple life insurance protection products like pure-term plans. It gives you high returns, life coverage, and the ULIP tax benefit. Moreover, ULIP is a highly flexible modern insurance plan where you control your investment and funds. You are free to invest in the market as per your risk appetite and, at the same time, have insurance security. Additionally, the ULIPs tax benefits are something that, as an investor, you cannot ignore.

However, you must ensure that you have analyzed your long-term financial goals and invested accordingly into ULIP. Also, you must understand that the longer you stay invested in ULIP, the higher returns you get. So if you are planning to save for a house, say 15 years from now, you must start investing in ULIP now.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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