Tax Benefits of Investing in a ULIP
Most people look for ways to grow their wealth, but effective tax planning is just as important. Choosing suitable financial products can help you reduce your tax liability while working towards your long-term financial goals. A Unit Linked Insurance Plan (ULIP) is one such option. It combines life insurance with market-linked returns and offers tax benefits under the Income Tax Act, 2025, subject to applicable tax laws.
Depending on the policy and the applicable tax provisions, you may be eligible for ULIP tax benefits on premiums, maturity proceeds and death benefits.
The tax treatment of ULIPs has changed in recent years, making it important to understand when these benefits apply. In this article, we will explain the tax benefits available in a ULIP, the conditions you need to meet, and the tax rules introduced through the Finance Act, 2021.
What are the Tax Benefits of Investing in a ULIP?
A ULIP plan offers tax benefits at different stages of the policy. This is why long-term financial planning proves beneficial for investors, in terms of tax efficiency.
Every premium you pay towards your ULIP serves two purposes. One portion provides life insurance, and the remaining amount is invested in market-linked funds.
Apart from helping you build long-term wealth and maintain a life cover, these premiums may also reduce your taxable income.
Premiums paid towards a ULIP qualify for a deduction of up to Rs. 1.5 lakh under Section 123 read with Schedule XV (under old tax regime) of the Income Tax Act, 2025, subject to applicable conditions.
Keep in mind:
- The deduction is available only if you opt for the old tax regime.
- You are eligible to claim this exemption if the premium does not exceed 10% of the sum assured.
Tax-exemption on ULIP Maturity Benefits
ULIP maturity benefits are tax-exempted but only if certain conditions are met. For ULIP policies issued on or after 1 February 2021, the tax treatment depends on the annual premium paid.
Maturity benefits remain tax-exempted if:
- The total annual premium for ULIP does not exceed Rs. 2.5 lakh, or
- The total annual premium across multiple eligible ULIPs does not exceed Rs. 2.5 lakh,
Remember: The tax treatment is subject to the conditions specified under Section 11 (read with Schedule II, Sr.No.2) of the Income-tax Act, 2025).
Tax-Free Death Benefit in ULIP
The Death Benefit in a ULIP plan is tax-free under Section 11 (read with Schedule II, Sr.No.2) of the Income-tax Act, 2025, subject to the applicable provisions.
Tax Treatment on ULIP withdrawals and surrender
It depends on when you withdraw or surrender the policy and whether it qualifies for tax exemption under the Income Tax Act.
In case of Partial Withdrawal, the withdrawals made after the lock-in period of five years are usually tax-free subject to conditions mentioned under Section 11 (read with Schedule II, Sr.No.2).
Surrendering the policy before completing the five-year lock-in period will have tax implications. After the lock-in period is over, the tax treatment of the surrender proceeds depends on whether your ULIP qualifies for exemption under Section 11 (read with Schedule II, Sr.No.2) of the Income-tax Act, 2025.
What are the Capital Gains Tax on ULIP Withdrawals?
If your total annual premium for a ULIP issued on or after 1 February 2021 exceeds ₹2.5 lakh, the maturity benefit may no longer qualify for tax exemption under Section 11 (read with Schedule II, Sr.No.2).
ULIPs have a mandatory lock-in period of 5 years. Since Short-Term Capital Gains (STCG) tax applies to investments redeemed within 1 year and is taxed at 20%, it is not applicable to ULIPs. Therefore, only Long-Term Capital Gains (LTCG) tax may apply, and that too only for policies where the aggregate premium paid exceeds ₹2.5 lakh per annum or where conditions prescribed as per the applicable provisions of the Income-tax Act are not satisfied.
Important to Note
This tax treatment does not apply to death benefits, which continue to remain tax-free under the applicable provisions.
Examples to Understand ULIP Tax Benefits
Below are some illustrative scenarios to help compare the different tax benefits in a ULIP.
Example 1: Annual Premium Within the Limit
Suppose Rishav purchases a ULIP with an annual premium of Rs. 1 lakh.
At maturity, he receives Rs. 20 lakh.
Since the annual premium does not exceed Rs. 2.5 lakh, the maturity proceeds are tax-free, subject to the conditions under Section 11 (read with Schedule II, Sr.No.2).
Example 2: Annual Premium Above the Limit
Suppose Rohan purchases a ULIP with an annual premium of Rs. 3 lakh.
At maturity, he receives Rs. 48 lakh.
Since the annual premium exceeds Rs. 2.5 lakh, the maturity proceeds become taxable under the applicable provisions.
Example 3: Multiple ULIPs
Suppose Riya purchases three ULIPs.
|
Policy |
Annual Premium |
Tax Treatment |
|
ULIP 1 |
Rs. 1 lakh |
Eligible for exemption, subject to conditions |
|
ULIP 2 |
Rs. 1.5 lakh |
Eligible for exemption, subject to conditions |
|
ULIP 3 |
Rs. 3 lakh |
May become taxable as the prescribed premium limit is exceeded |
This example highlights why it is important to consider the combined annual premium when investing in multiple ULIPs.
How Can You Maximise the Tax Benefits of a ULIP?
Here are a few practical tips:
- Keep track of your annual premium to understand whether it falls within the prescribed limit.
- Review all ULIP policies together if you have more than one active policy.
- Choose an appropriate tax regime while claiming deductions under Section 123 (under old tax regime).
- Understand all the policy terms before investing.
- Stay informed about changes in tax laws, as tax provisions may change over time.
ULIPs can offer valuable tax benefits on premiums, maturity proceeds, and death benefits, subject to the applicable provisions of the Income Tax Act. However, tax treatment depends on factors such as the policy issue date, annual premium, and the conditions mentioned under the law. A ULIP Calculator can help you estimate returns, and you can then explore potential tax benefits and plan your investment accordingly.
Before investing, take time to understand the policy features and the applicable tax rules. A clear understanding of these provisions can help you make informed decisions and maximise the tax benefits available under your ULIP.
- What is the 10% premium capping rule?
To claim the full tax deduction, the annual premium should not exceed 10% of the policy's sum assured for ULIPs issued on or after 1 April 2012. If the premium stays within this limit, you can claim the applicable tax benefit, subject to the provisions of the Income Tax Act.
- Does GST apply to ULIP Plan?
No. GST has been removed from individual ULIPs, effective from September, 2025
- Is ULIP a wise investment decision?
It depends on the investment goals. If a tax-efficient product offering dual benefits of insurance and investment is an objective, ULIP can be a good choice. That said, ULIPs may be more beneficial when invested for the long term.
Tax benefits as per prevailing Section 11 (read with Schedule II, Sr.No.2) of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy
Bajaj Life Insurance Limited (Formerly known as Bajaj Allianz Life Insurance Company Limited)
BEWARE OF SPURIOUS PHONE CALLS AND FICTITIOUS / FRAUDULENT OFFERS - IRDAI or its officials do not involve in activities like selling insurance policies, announcing bonus or investment of premiums. Public receiving such phone calls are requested to lodge a police complaint.
Risk Factors and Warning Statements: Bajaj Life Insurance Limited, Regd. Office Address: Bajaj Insurance House, Airport Road, Yerawada, Pune - 411006, Reg. No.: 116, CIN : U66010PN2001PLC015959, Call us on Customer Care Number - 020-6712 1212, Mail us : customercare@bajajlife.com. The Logo of Bajaj Life Insurance Limited is provided on the basis of license given by Bajaj Finserv Ltd. to use its “Bajaj” Logo. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajlifeinsurance.com) carefully before concluding a sale. All charges/ taxes, as applicable, will be borne by the Policyholder.
IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER.
ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs 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. Bajaj Life Insurance Limited is only the name of the unit linked insurance contract and 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 issued by the insurance company. 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.
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 or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year
