The annual Indian Budget updates set the investment market sentiment, often in a dynamic and unpredictable direction. Since the 2021 Union Budget, we have come down to the 2025 Union Budget, introducing changes that demand attention from every investor. You're undoubtedly considering how these shifts will affect your long-term investments, right? Specifically, the budget's revisions to tax implications.
Well, today, we are going to keep ULIPs and the traditional plans as the centre of discussion and understand the impact of new tax implications. Let’s provide you with a detailed analysis of how these changes, especially concerning tax slabs, influence your savings and investment strategies further.
Key Takeaways
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A Unit-Linked Insurance Plan (ULIP) is a hybrid financial product that offers life insurance and investment opportunities. While a portion gets invested in different financial products, it also provides tax exemption perks under Section 80C of the Income Tax Act 1961. It is a smart investment strategy with 5 year lock-in period for which you can calculate returns using an income tax calculator.
A traditional savings plan is a secure financial instrument that offers a steady corpus over time. These include endowment policies and money-back plans that guarantee a lump sum or periodic payouts. Similar to ULIPs, they offer tax exemption benefits. However, the major difference is the returns fall under different tax slabs.
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With the new budget announcements, investors need to be mindful of how tax slabs affect different investment instruments. Here’s how the changes impact ULIPs and traditional savings plans:
If your annual premium for a ULIP exceeds ₹2.5 lakh, the gains on maturity are taxable under Long-Term Capital Gains (LTCG) in a financial year. This was done after the updates had been rolled out. Withdrawals before the five-year lock-in period will be added to your income and taxed according to your tax slab.
It is proposed to include ULIPs with premiums exceeding 10% of the policy’s sum assured alongside those with annual premiums above ₹ 2.5 lakh.
Source: Clear Tax
Traditional savings plans usually remain tax-free upon maturity under Section 10(10D), provided premiums paid do not exceed 10% of the sum assured.
Money-back plans provide periodic payouts generally exempt from tax if the total premium paid meets the conditions of Section 10(10D).
The right choice depends on your financial goals. Here’s a quick guide to help you decide:
Choose ULIPs if: You want higher returns and flexibility to invest in market-linked funds while enjoying tax benefits.
Choose Traditional Savings Plans if: You prefer guaranteed returns with minimal risk, even if it means lower growth potential.
Here’s a quick overview of their difference based on their features.
Feature | ULIPs | Traditional Savings Plans |
Tax Deduction on Premiums (Section 80C) | Up to ₹1.5 lakh per year | Up to ₹1.5 lakh per year |
Tax-Free Maturity (Section 10(10D)) | Only if the annual premium is ≤ ₹2.5 lakh | Generally tax-free |
Lock-in Period | 5 years | Varies (depends on plan type) |
Investment Component | Equity, debt, or hybrid | Fixed return-based |
Flexibility | Fund switching available | No flexibility |
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While both ULIPs and traditional savings plans offer tax advantages, the finer details of their treatment can be quite distinct. Understanding these differences requires brief knowledge of the applicable regulations. Here are the key areas where their tax benefits diverge to provide you with clarity on the same:
1. Premium Deductions - Section 80C: ULIPs and traditional savings plans qualify for deductions up to ₹1.5 lakh per year. However, ULIPs offer an investment component that can potentially provide higher returns and then fall under a different tax slab.
2. Tax on Maturity - Section 10(10D): Traditional savings plans usually offer completely tax-free maturity benefits. However, for ULIPs issued after 1st February 2021, if your annual premium exceeds ₹2.5 lakh, the returns are taxed under Long-Term Capital Gains (LTCG) at 10% if gains exceed ₹1 lakh. For this, you can leverage an income tax calculator available online to know the exact taxable amount on maturity.
3. Tax on Partial Withdrawals:
ULIPs: Partial withdrawals after the five-year lock-in period are tax-free under specific conditions.
Traditional Savings Plans: No partial withdrawals are available under traditional savings plans. Policy loans may be an option to overcome taxes, but again, they may attract interest charges.
4. Taxation on Surrendering the Policy Early
ULIPs: If surrendered before five years, all tax benefits will be reversed, and the amount will be added to your taxable income.
Traditional Plans: Early surrender usually leads to reduced payouts, with tax implications depending on the plan's length.
5. Tax Implications Based on Market Performance: ULIPs have an investment component, meaning gains are market-dependent. Since these gains are treated as capital gains, taxation rules differ from traditional savings plans, which have fixed returns and remain tax-free at maturity.
Understanding how tax slabs influence ULIPs and traditional plans empowers you to take control of your financial future. Whether you prioritise growth or stability, your investment strategy should be aligned with your goals. Here, the key is to be proactive when it comes to knowing the tax benefits between different investment options.
At Canara HSBC Life Insurance, apart from providing you with some of the best insurance plans, we also make leveraging digital calculators easier than ever. From ULIP to Income Tax calculators, our website has several digital tools that you can use to streamline your financial goals.
Take charge of your financial future and invest confidently with Canara HSBC Life Insurance today!
Both provide tax benefits, but ULIPs offer potential market-linked growth, whereas traditional plans provide tax-free fixed returns.
No, if the annual premium exceeds ₹2.5 lakh, gains are taxed at 10% if exceeding ₹1 lakh.
Yes, ULIP premiums qualify for Section 80C deductions up to ₹1.5 lakh annually.
It helps estimate tax liabilities and compare potential tax savings on both options.
Tax benefits availed will be reversed, and the amount will be added to your taxable income.
Yes, but it varies by plan type, typically ranging from five to ten years.
No, traditional plans have fixed returns, whereas ULIPs allow tax-free fund switching.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
