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Tax Benefits of Unit Linked Insurance Plans

Published On Aug 30, 2021 3:30 PM By InsuranceDekho

When it comes to tax-saving investments, there are a variety of possibilities. However, some investments are wiser than others. In this post, we'll look at why buying a Unit Linked Insurance Plan (ULIP) is a good idea, especially when it comes to tax planning, which is a subset of financial planning.

A unit-linked insurance plan (ULIP) is an option that blends life insurance and market-linked asset accumulation. Furthermore, because these plans can invest in both the equity and debt markets, they have the potential to outperform conventional tax-saving programs.

Tax benefits in Unit Linked insurance Plans

Let's take a closer look at some of the incredible tax advantages of ULIPs -

  • Maturity Tax Benefits

You put money into a ULIP and saved some money in taxes at the same time. But what happens if you sell your investment after it has reached maturity? Do you have to pay taxes on the entire maturity payment or just the profit you made? The good news is that if all due premiums are paid, you will not have to pay any tax at the time of maturity for policies issued before February 1, 2021, as ULIPs provide a tax-free maturity amount under Section 10 (10D) of the Income Tax Act 1961, subject to the restrictions therein. 

If the aggregate premium in a financial year exceeds Rs.2.5 lakhs, the maturity proceeds from such insurance will be taxed as a capital asset, according to the latest Finance Bill, for policies issued after 1 February 2021. However, for plans with yearly premiums of less than Rs.2.5 lakhs in aggregate, the tax exemption under Section 10(10D) will continue, subject to the limitations thereof.

  • Premium tax advantage

The single most significant advantage of purchasing a ULIP policy is that you can deduct the whole premium you pay from your taxable income up to a ceiling of Rs 1.5 lakh under section 80C of the Income Tax Act, 1961, subject to the restrictions therein. The amount of life insurance you need should be at least ten times the amount you pay in annual premiums.

Must read: Basic Things To Know About ULIP Before Purchasing It    

  • Tax-free payout in the event of death

If the policyholder dies, the deceased's nominees receive the entire sum promised, or the total value of the fund in which the policyholder had invested, whichever is higher, according to the policy terms and conditions. While the family copes with the loss of a loved one, they do not have to be concerned about their life ambitions being limited by the lump-sum payment or installment payment. Furthermore, with the exception of a Keyman Policy, the whole payout in the case of the policyholder's death is tax-free.

  • Partial withdrawals are tax-free

If you remove money from your ULIP plan after the five-year lock-in period, you won't have to pay taxes on that withdrawal as well, as long as the amount is less than or equal to 20% of the fund's value.

  • Deductions on top-ups

Another advantage of ULIP programs is their adaptability. ULIPs, for example, allow investors to boost their investment by purchasing monthly top-ups. This way, whenever you have extra money — or need to make last-minute investments to reduce your tax bill — you can use it to increase your ULIP investment by purchasing more units. These top-ups are also eligible for income tax deductions under Section 80C of the Income Tax Act of 1961, subject to certain limitations.


A Unit Linked Insurance Plan (ULIP) combines insurance and investment into one package. The purpose of a ULIP is to provide wealth development as well as life insurance, with the insurance company investing a portion of your money in life insurance and the balance in a fund that is based on equity, debt, or both and meets your long-term goals. These objectives could include retirement preparation, children's education, or any other significant event for which you wish to save.

Also read: How Are ULIPs Different From Endowment Plans?

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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