• Tax Benefits of ULIP Plans in India

    Life Insurance
    • Premiums as low as Rs.17/day for sum assured of Rs.1 crore*
    • Claim up to Rs. 1,50,000 deduction under section 80C**
    • Choose between annual and monthly premium payment options

    Unit-linked insurance policies (ULIPs) are plans that combine the benefit of both insurance and investment under a single policy. With the Union Budget 2018 imposing an income tax on long-term capital gains from mutual funds, ULIPs have become a hot property among tax experts. ULIPs are offered by almost all the top life insurance companies in the market. Most people invest in ULIPs on a long-term basis to get good returns from their funds. Let’s take a brief look at different attributes of ULIPs and how they can help in tax saving.

    How ULIPs work?

    ULIPs are investment-oriented life insurance covers that offer both insurance and investment benefits to policyholders. A portion of the premium amount invested by the policyholder is invested in a life insurance plan, while the other portion is invested in various investment funds. Insurers provide different fund options for their customers. Customers are allowed to switch from one fund to another based on their risk tolerance. The returns generated from a ULIP are dependent on the performance of the fund in the market. Though there is a potential for high returns, ULIP investments are subject to market risks. Also, there are no guaranteed maturity returns available, unlike endowment plans.

    Things to note before investing in ULIPs

    If you are searching for a ULIP to invest, you must consider the following factors before you proceed with the process:

    • Most ULIPs in the market have a fixed lock-in period (usually 5 years). The invested amount cannot be withdrawn during this period.
    • If a ULIP is surrendered before the completion of the lock-in period, it is likely to attract heavy penalties and surrender charges.
    • The policy term for ULIPs varies from one plan to another. The life insurance coverage is available for the entire policy term.
    • The life coverage offered by ULIPs comes with a fixed sum assured amount. In the case of the unexpected demise of the policyholder within the policy term, ‘the sum assured on death’ mentioned in the policy document will be paid to his/her dependents.
    • Customers are allowed to switch funds only for a fixed number of times in a year in many policies. However, there are some policies that offer unlimited fund switching within a policy year.
    • When you invest in ULIPs, you must be aware of the different charges associated with the policy. Some of the charges include premium allocation charges, policy administration charges, fund management charges, mortality charges, etc. You must read the policy document and get an idea about the charges before investing in a policy.
    • Unlike mutual funds, the investment component in ULIPs is not very diversified. Hence, there is a high chance of risk involved in these investments.

    Tax benefits available under ULIPs

    Similar to other life insurance investments, various tax benefits are also available for ULIP investments. Income tax benefits are available for both investments and maturity returns. Some of the tax benefits available with ULIPs are given as follows:

    • Tax relief on investments: The premium amount invested in ULIPs is eligible for tax relief as per Section 80C and 80CCC of the Income Tax Act. A maximum of Rs.1.5 lakh deduction can be claimed under this section. Investments made in other life insurance plans will also be considered while calculating deduction under this section.
    • Tax relief on maturity returns: The maturity benefits you receive from ULIPs are also exempt from income tax as per Section 10(10D) of the Income Tax Act. In the case of the death of the policyholder, the death benefit paid to the beneficiary is also exempt from income tax.
    • Unit-linked pension plans: These plans work similar to the pension plans or annuity plans offered by life insurers. In this case, the insured person will receive both the lump sum benefit as well as the annuity benefit from the policy. Here, the lump sum benefit is exempt from tax. However, the periodic pension payments count towards your monthly income and they are taxed accordingly.
    • Condition to claim tax relief: There is a special condition for ULIPs to claim income tax relief. Here, the policy must be in force for at least two years to claim valid tax relief. However, if the policy is discontinued before two years, any tax relief obtained on the policy will be added back to the insured’s income in the subsequent year and taxed accordingly.
    • Top-up investments: Many ULIPs allow investors to make additional investments in their policies through top-ups. These top-ups are also eligible for tax relief under Section 80C and 80CCC on condition that the overall investment does not exceed 10% of the sum assured amount chosen in the policy.


    ULIPs can function as effective wealth creation and tax-saving tools if they are used wisely. Before you start with your ULIP investments, make sure you read the policy document carefully and understand the terms and conditions. Also, it is necessary to choose the funds according to your risk preference. If you wish to have minimal risk, a conservative approach in the form of debt fund investment can be helpful. The different types of tax benefits available with ULIPs also make them worthy of your consideration when it comes to financial planning.

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