How to save ULIP Tax On Maturity & Its Benefits?

How to save ULIP Tax On Maturity & Its Benefits?

Unit Linked Insurance Plans (ULIPs) have evolved into one of the most versatile financial instruments in India. ULIPs are investment-oriented life insurance policies that offer a unique blend of wealth creation and protection. They help you earn market-linked returns on your investments so that you can build up an inflation-adjusted corpus for your financial goals. Moreover, with the flexibility of partial withdrawals, top-up premiums, switching, etc., you can exercise full control over your investment and manage it as you want to, while also enjoying the comprehensive ULIP plan tax benefit.

While ULIPs give these benefits, they also help you save tax with a strategically planned tax saving ULIP.

Yes, you read that absolutely right. ULIPs are tax-saving investment avenues that can go a long way in tax planning, provided you understand the underlying market risks and the latest regulatory updates from the Finance Act.

Understanding ULIP Tax Benefits Across Different Stages

Tax saving under a ULIP policy occurs at different stages. So, here’s a list of all the ways in which you can save tax with ULIPs –

• Tax saving on the premium (Section 80C)

The premium that you pay to buy the unit linked policy gives significant tax saving ULIP advantages. It is treated as a deduction from your taxable income under Section 80C of the Income Tax Act, 1961.

1. The Limit: The maximum deduction allowed is Rs. 1.5 lakhs.

2. The Condition: To qualify for this, the annual premium must be within 10% of the sum assured.

3. Tax Regime Note: Please note that Section 80C deductions are primarily available under the Old Tax Regime.

If you buy pension ULIPs, tax deduction would be available on the premium amount. However, the ULIP tax deduction section would change from 80C to 80CCC. The limit is the same, i.e, Rs. 1.5 lakhs, and it includes the limit of deduction allowed under Section 80C.

Furthermore, if you opt for a critical illness or any other medical coverage add-on or rider with your ULIP, such a premium would be allowed as a deduction under Section 80D. You can claim a maximum deduction of Rs. 25,000 which would increase to Rs. 50,000 if you are a senior citizen, i.e, aged 60 years and above.

2. Tax exemption on partial withdrawals

ULIPs allow partial withdrawals from the fund value after the mandatory 5-year lock-in period. This not only imparts liquidity; it also gives you a tax-exempt source of financing your dreams. Currently, the partial withdrawals are not taxed, and you can avail of them when you need funds for your financial needs without disrupting your entire investment.

Also Read: Section 80G: Income Tax Deductions for Donations

3. Tax Saving on Fund Switching

Switching in simple language means changing investment funds (e.g., from Equity to Debt or vice-versa). You might change the funds when the market conditions change so that you can reap maximum gains and reduce the risks. One of the biggest advantages of a ULIP plan tax benefit is that this switching does not attract any tax. In a volatile market, if you switch from an equity fund to a debt fund to protect your capital, the amount that you switch would not be taxed. This makes ULIPs more tax-efficient than Mutual Funds, where every switch is treated as a sale and may attract Capital Gains Tax.

4. ULIP Tax Exemption on the Death Benefit

In the case of the unfortunate demise of the policyholder during the policy tenure, the death benefit that the ULIP pays to the nominee is treated as a fully tax-exempt income under Section 10(10D), regardless of the premium amount..

5. ULIP Tax Saving on Maturity

Lastly, the maturity benefits received from a unit linked insurance policy is also subject to tax exemption under the provisions of Section 10(10D) if specified conditions are met. These conditions are as follows –

• The premium paid should not be more than 10% of the sum assured
• The total premium paid, for all ULIPs issued on and after Feb 1, 2021, does not exceed Rs.2.5 lakhs

If the first condition is not met, the net gain earned on maturity of the policy would be taxed at your income tax slab rates.

On the other hand, if your aggregate ULIP premium exceeds Rs.2.5 lakhs, the tax liability would depend on the fund into which you invested. If you invested in equity oriented funds, the net gain from the ULIP would be exempted from tax up to Rs.1 lakh. If the gain exceeds Rs.1 lakh, only a marginal rate of tax of 10% would be payable on the profits earned.

If you had invested in a debt fund, the returns earned would be taxed at 20% but with indexation benefit.

In the case of pension ULIPs, you can claim a tax exemption on 60% of the fund value that you can withdraw on maturity. This exemption would be allowed under Section 10(10A) of the Income Tax Act, 1961 and give you a tax exempted income.

Also Read: Income Tax on Pension

Key Benefits of ULIP Plan

ULIP combines the best of both worlds, offering the protection of life insurance and wealth creationpotential of investments. Buying a tax saving ULIP plan is a smart move. Here’s why.

Dual Advantage: Protection + Investment: While a term plan shields your future, Unit Linkedin Insuranceplan goes a step ahead. ULIPs give you that edge by offering life cover along with the opportunity to invest in equity, debt, mutual funds, bonds, stocks or balanced funds. This makes them ideal for those looking to build long-term wealth while staying insured.

Tax Savings: Premiums paid towards ULIPs are eligible for tax deductions under Section 80C of the Income Tax Act (up to ₹1.5 lakh per year). In many cases, the maturity amount is also tax-exempt under Section 10(10D), making ULIP plan tax benefit a viable choice. However, there are certain conditions and you should go through the plan in detail to understand better.

Fund Switching Flexibility: Choosing a tax saving ULIP lets you reap the benefits of market-linked returns. ULIPs even allow you to switch between fund types (equity, debt, or hybrid) depending on your market outlook or risk preference. You can switch between funds without any tax impact or additional charges. Make sure to access the market condition well and invest in funds which fit your needs.

Goal-Based Investing: ULIPs help you invest in a disciplined, long-term way aligned with specific life goals. A part of your premium goes towards insurance coverage, whereas other part can be invested in market-linked funds. You can use those funds to plan for your child’s education, retirement or improve your financial stability.

Transparency and Control: With detailed policy statements, fund performance reports, and visibility into charges, ULIPs offer greater control and transparency compared to other plans.

Partial Withdrawals: Certain plans offer partial withdrawals option, making it easier to withdraw money whenever you need. Again, there might be some conditions. Make sure to access the conditions and choose the right plan.

Long-Term Wealth Creation: ULIPs offer tax benefits but there is a mandatory five-year lock-in period you’ll have to adhere to. This is a mandate by the Insurance Regulatory and Development Authority of India (IRDAI). encourages disciplined investing. However, this approach can help you build significant corpus over time, especially when started early.

The Critical Rules for ULIP Tax on Maturity

Unit Linked Insurance Plan maturity proceeds are generally tax-free under Section 10(10D) of the Income Tax Act, provided certain conditions are met. One of the key rules is that the annual premium should not exceed 10% of the sum assured for policies issued after 1 April 2012. For policies issued on or after 1 February 2021, an additional condition applies: if the aggregate annual premium across all ULIPs exceeds ₹2.5 lakh, the maturity proceeds become taxable as capital gains. In such cases, gains are taxed as equity-oriented capital gains, depending on the holding period. Long-term capital gains above ₹1 lakh are taxed at 10%, while short-term gains are taxed at 15%. However, the death benefit remains fully tax-exempt, irrespective of the premium amount. Understanding these maturity tax rules is essential to plan investments efficiently and avoid unexpected tax liabilities at the time of policy payout.

Why a Tax Saving ULIP is a Smart Addition to Your Portfolio

A tax saving ULIP can be a smart addition to your portfolio as it combines investment growth with life insurance protection in a single plan. One of its key advantages is tax efficiency, premiums paid may qualify for deductions under Section 80C, while maturity proceeds can be tax-free under Section 10(10D), subject to prevailing conditions. ULIPs also offer flexibility, allowing investors to switch between equity and debt funds based on market conditions or life goals without triggering tax liability. This makes them suitable for long-term financial planning and dynamic asset allocation. 

Additionally, ULIPs promote disciplined investing through regular premiums and have a mandatory lock-in period that encourages long-term wealth creation. When aligned with financial goals such as retirement or child education, a tax-saving ULIP helps balance risk, returns, and protection making it a valuable and well-rounded addition to a diversified investment portfolio.

ULIP vs. ELSS: Which is the Better Tax Saving Investment?

ULIPs and ELSS funds are both popular tax-saving investment options under Section 80C, but they serve different financial needs. ELSS funds are pure equity mutual funds with a shorter lock-in period of three years, making them suitable for investors seeking higher growth potential and liquidity. They are ideal for those with a higher risk appetite and no immediate need for insurance cover. ULIPs, on the other hand, combine life insurance with market linked investments and have a 5 years lock-in period. They offer flexibility to switch between equity and debt funds without tax implications, helping investors manage market volatility over the long term. ULIPs may also provide tax-free maturity benefits, subject to applicable rules. Choosing between ULIP and ELSS depends on your financial goals, ELSS is for pure wealth creation and ULIP is for those looking to balance tax savings, protection, and long-term financial planning.

ULIP Tax Benefits: Old vs. New Tax Regime (FY 2026-27)

ULIP tax benefits vary significantly depending on whether you opt for the old or the new tax regime in FY 2026–27. Under the old tax regime, premiums paid towards a ULIP may qualify for deduction up to ₹1.5 lakh under Section 80C, subject to policy conditions. Additionally, maturity proceeds can be tax-exempt under Section 10(10D), provided the premium and sum assured criteria are met. In contrast, the new tax regime does not allow deductions under Section 80C, which means ULIP premium payments do not offer upfront tax savings. However, maturity benefits may still be tax-free under Section 10(10D), as this exemption is available under both regimes, subject to applicable limits such as the ₹2.5 lakh annual premium rule for policies issued after 1 February 2021. Therefore, ULIPs tend to be more tax-efficient under the old regime, especially for individuals seeking deductions along with long-term investment and insurance benefits.

Conclusion

ULIPs, therefore, give accelerated tax benefits on ULIP Plan which help you reduce your tax liability and also create a tax-free corpus. Add to it the potential of market-linked returns, flexibility in managing your investments, professional fund management and life insurance coverage, and ULIPs become a complete package.

So, invest in ULIPs and understand how they can help you plan your taxes effectively.

Choose an insurer that offers a range of unit linked plans so that you can pick suitable plans that match with your financial goals.

Aviva Life Insurance offers a range of ULIPs that can cater to your financial needs. Explore the available plans and invest in them for your tax planning and financial planning goals.

AN Nov 24/21