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Frequently Asked Questions About ULIP Taxation

Updated On Sep 18, 2021

ULIP participants, unlike MF investors, have the choice of investing in numerous funds with varying degrees of equity and debt exposure, all inside the same ULIP. The Finance Bill, which introduced the new ULIP taxation in Budget 2021, did not provide details about ULIP taxability in various scenarios, such as tax treatment of investments into different funds within the same ULIP and what happens when switching from one type of fund to another within the same ULIP. The government's most recent modification is an attempt to eliminate such ambiguity. On April 1, 2021, the measures stated in Budget 2021, including the ULIP taxation scheme, will take effect.

Frequently Asked Questions About ULIP Taxation

Below are a few frequently asked questions about ULIP Taxation:

1. What Is A Unit Linked Insurance Plan, And How Does It Work?

A Unit Linked Insurance Plan (ULIP) is a hybrid investment strategy that combines insurance and investing to meet the needs of individual investors. The premium paid for a ULIP goes toward both the policyholder's insurance and the policyholder's investment. Based on the investor's goals and risk appetite, the investable component of the premium is invested in equity, debt, money market, or a combination of all three.

Must Read: ULIP Or SIP? Which Is Better?

2. What Are The Different Kinds Of ULIPs?

ULIPs can be used for a variety of purposes, including retirement planning, wealth growth, child education, family security, and so on. ULIPs, for the most part, offer the choice of paying a single premium or a recurring premium. ULIPs are classified into the following categories based on the types of portfolios in which the life assured's money is invested:

  • Funds that invest in stocks
  • Funds that are based on debt
  • Money Market Mutual Fund
  • Funds that are well-balanced.

3. Is There A Deduction For ULIP Investments Under Chapter VI-A?

Yes, the investment in a ULIP qualifies for a Section 80C deduction. Individuals can deduct investments made for themselves, their spouses, or their children (dependent or independent), and HUFs can deduct investments made for any member of the HUF.

Section 80C allows for a deduction of up to 10% of the actual capital sum guaranteed. It indicates that if a person pays an extravagant price for an insurance policy, the deduction for the entire payment will not be authorized. The deduction will be limited to 10% of the sum guaranteed, and any premium paid in excess of this level will not be deductible.

4. When Is An Exemption For The Amount Received Under A ULIP Authorized Under Section 10(10D)? (Ahead Of The Budget)

Section 10(10D) of the Internal Revenue Code exempts any payment received under a ULIP, including any sum allocated as a bonus on such insurance. However, if the premium for any year during the policy's term exceeds 10% of the real capital sum assured, no exemption under this section will be granted with respect to the amount received under the policy. This is regarded as an 'extra premium' issue.


Any profit earned on a ULIP investment with a yearly premium of up to Rs 2.5 lakh would continue to be tax-free. However, if the annual investment exceeds Rs 2.5 lakh, the investor must define the type of funds to determine their taxability, according to the new amendment.

When ULIPs have at least 65 percent of their assets in equity (directly investing in stocks) or at least 90 percent of their assets in equity (indirectly investing in stocks), they will be taxed similarly to equity mutual funds.

Also Read: Which ULIP Fund Option To Invest In For Short Term Gains?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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