ULIP Tax Benefits And Its Implications: A Complete Guide

ULIP Tax Benefits And Its Implications: A Complete Guide


Unit-Linked Insurance Plans also popularly referred to as ULIPs are a unique type of life insurance. They are market-linked plans that allow you to meet two major financial goals. The goals are getting life insurance along with opportunities to generate returns on your investments. In contrast to traditional life insurance tools like term insurance plans that only provide life insurance protection or high-risk investment avenues like direct investments in the stock market.

Given the advantages of ULIP include providing life cover, generating returns, and tax benefits in a single plan, it is one of the best vehicles for long-term wealth growth. Additionally, it allows you to generate returns and provide life insurance. While understanding the ULIP meaning, you will come across the several tax benefits that the plan offers. *

After understanding the meaning of ULIP, let’s dive further. One of the many features that ULIPs provide is to choose where you want to invest your money based on your risk appetite. You may choose to invest in debt, equity, and balanced funds depending on your business goals. You can switch your fund allocation by using features of ULIP like fund switching or premium redirection. Understanding the meaning of ULIP i.e what is ULIP and how it works offers a lot of advantages.

Five tax advantages of ULIPs

1. Tax deductions are available for premiums paid for a ULIP

Section 80C of the Income Tax Act of 1961 allows deductibles on the premiums you pay. The maximum limit of the section is up to Rs 1,50,000. The premium must, however, be not more than 10% of your ULIP sum assured to be eligible for deduction. The deduction amount is still capped at 10% for premiums above that percentage. For example, consider you have a ULIP policy is Rs. 4,00,000 with a sum assured value of Rs. 20,00,000. However, once you stop paying the premiums, you may not be able to avail yourself of any deductions.  Standard T&C apply.

2. ULIP provides tax advantages upon maturity

When a ULIP matures, the amount you receive is subjected to tax exemptions. As per the Income Tax Act 1961, the amount is subjected to tax exemption. The exemption is received specifically based on Section 10(10D) of the Act. However, the total premium amount cannot be more than 10% of the overall sum assured of the plan.

It is important to note that there is a Long-Term Capital Gains (LTCG) tax applicable to ULIPs purchased on or after February 1, 2021. This tax is applicable as per Section 112A of the Income Tax Act of 1961.

3. A ULIP enables tax-free partial withdrawals

After the ULIP 5-year lock-in period has passed, you withdraw a certain amount of your fund value. This partial withdrawal feature of ULIP is helpful in terms of emergencies. The partial withdrawal limit is usually up to 20% of the fund value. This aids in tax avoidance and enables you to take out a portion of your savings for a variety of reasons, including retirement, property purchases, marriage, children’s education, etc.

4. A ULIP’s death benefit is not subject to taxation

A ULIP’s death benefit is paid to the nominee of your policy and is not subjected to taxation. The death benefit includes either the sum assured value or the fund value, whichever is higher. As per Section 10 (10D) of the Income Tax Act, the sum assured that the nominee receives is exempt from taxes.

5. Tax deductions are available for additional top-ups that you avail of on your existing plan

You can choose the additional coverage as a top-up along with your current plan. Section 80C of the Income Tax Act of 1961 provides tax deductions for the additional premium you pay. However, the tax benefits cannot be claimed if the premium is more than 10% of the sum insured.


Understanding the true ULIP meaning is essential as it is the ideal plan that offers life insurance and investment opportunities in a single plan. In addition, ULIPs are unique life insurance plans that allow you to have complete control over your investments and money.

ULIP is ideal and invests in those goals. You must also be aware that if you invest in it for the long haul you are likely to get better returns with the power of compounding. ULIP is a great investment to consider for the long haul with the tax benefits and the investment compounding that it offers. Hope this article helped you understand ULIP meaning and benefits.