Tax Benefits in ULIP

ULIPs blend protection with investing, letting you allocate premiums to equity, debt, or balanced funds while maintaining life cover. Beyond performance and flexibility, the real edge for many investors lies in ULIP taxation, how premiums, switches, withdrawals, and maturity proceeds are treated. In this page, explore the top ULIP tax benefits available today, the rules that govern ULIP taxation, and the scenarios where an ULIP tax exemption applies. You’ll also find Budget 2025 updates, other core ULIP benefits beyond tax savings, and a practical checklist to pick the right plan.

A Unit Linked Insurance Plan (ULIP) combines life insurance with market-linked investments, letting you build wealth while securing your family’s future. Part of your premium goes towards life cover, and the rest is invested in funds aligned to your risk profile (equity, debt, or balanced). This structure is central to ULIP benefits for long-term investors seeking protection plus growth.

ULIPs also offer flexibility to switch between funds, top-up investments, and adjust premiums within policy rules, making them adaptable to changing goals. This flexibility, along with potential ULIP tax benefits under current law, has made ULIPs popular among goal-based planners.

ULIP taxation depends on premium thresholds, policy issue dates, holding periods, and compliance with Section 10(10D) conditions. Deductions may apply to premiums, while maturity proceeds can be exempt or taxed based on specific eligibility criteria.

When structured correctly, ULIP tax benefits can meaningfully reduce outgo and improve post-tax returns.​

Front-Loaded Deductions for Disciplined Savers:

Premiums qualify under Section 80C up to ₹1.5 lakh, giving you an immediate tax break in the contribution year, perfect if you're already maxing out other 80C instruments and need an alternative channel.

Risk Cover Never Attracts Tax:

Whether the policy matures or triggers a claim, the nominee receives death benefits fully exempt under Section 10(10D), keeping the protection layer tax-efficient regardless of market performance or premium thresholds.

Goal Completion Without Surprise Tax Bills:

When an eligible ULIP matures, proceeds remain exempt under Section 10(10D) if conditions align, no surprise capital gains, no wealth tax equivalent, just straightforward wealth compounding if you've stayed within premium limits.

Fallback Tax Treatment if the Exemption Lapses:

For ULIPs that fall outside exemption rules, you're not penalised with "other income" taxation; instead, gains follow equity-style long-term capital gains norms after 12 months, often with threshold relief that softens the effective rate.

Smart Sequencing Across Multiple Plans:

By staying within the ₹2.5 lakh aggregate annual premium across all ULIPs, you can keep select policies "eligible" and let others grow as taxable assets, giving you control over which plans retain ULIP tax benefits.​

ULIP taxation can be optimised with smart policy selection and premium planning. These ULIP benefits hinge on meeting Section 10(10D) conditions and leveraging deductions efficiently.

1. 80C Deduction on Premiums: Premiums for eligible ULIPs qualify for deduction under Section 80C up to ₹1.5 lakh within the overall limit. This reduces taxable income in the contribution year. Keep total 80C allocations efficient so ULIPs don’t crowd out higher-priority commitments.​
   
   
2. 10(10D) Exemption on Maturity (Subject to Conditions): Maturity proceeds can be tax-free if the policy meets Section 10(10D) conditions, including the aggregate ULIP premium threshold test. Staying within ₹2.5 lakh aggregate annual premium across ULIPs preserves this ULIP tax exemption. Monitor premiums across policies each year to retain eligibility.​
   
   
3. Tax-free Death Benefit: Nominee payouts remain exempt irrespective of premium thresholds. This protects the risk cover objective of ULIPs. Ensure an adequate sum assured to align with family needs.
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4. Capital Gains Treatment When Not Exempt: If the exemption doesn’t apply, non-exempt ULIPs are treated as capital assets, taxed like equity-oriented funds. Long-term capital gains apply beyond 12 months, with threshold relief on gains. This can be preferable to “other income” treatment.​
   
   
5. Planning Across Multiple Policies: Only eligible ULIPs (within the aggregate ₹2.5 lakh premium limit) retain exemption; others become taxable. You can sequence premiums to keep chosen policies eligible. Ensure to maintain a premium tracker across years to avoid losing exemptions inadvertently.

Recent updates clarified how non-exempt ULIPs are taxed, bringing consistency with equity-oriented capital gains rules. Budget commentary emphasises that ULIPs failing Section 10(10D) conditions are treated as capital assets, with gains taxed accordingly.

ULIPs are built for long-term goals, offering protection, disciplined investing, and flexibility beyond ULIP tax benefits. For many investors, these benefits are as valuable as the tax features.

• Life Cover with Investing: These plans bring protection and growth under one roof, so your premiums work twice, funding a life cover for your family while investing in market-linked funds to build long-term wealth.
  1. A single product provides life insurance coverage and market-linked growth
  2. Premiums are split between risk cover and fund investments aligned to your goals
  3. This helps you stay invested without compromising family protection
      
• Goal-based Wealth Creation: They turn goals into a plan by mapping equity/debt to each milestone, compounding through cycles, and automating contributions to keep you on track.
  1. Equity and debt fund choices support goals like education, home purchase, or retirement
  2. Staying invested through market cycles compounds returns
  3. Automated features like top-ups support disciplined saving
      
• Fund Switching Flexibility: Use fund switching to actively realign your ULIP, shifting across equity, debt, and balanced options as your risk profile and markets evolve, while keeping taxation tied to overall policy eligibility rather than each switch.
  1. Switch between equity, debt, and balanced funds without exit loads within policy rules
  2. Rebalance as risk tolerance and market conditions change
  3. Tax outcomes follow overall ULIP eligibility, not each switch
      
• Partial Withdrawals: Use partial withdrawals as a safety valve to access cash after the lock-in period without derailing your plan, keeping liquidity handy while the policy stays invested.
  1. After the lock-in, you can withdraw partially for emergencies or milestones
  2. This offers liquidity while keeping the policy active
  3. Plan withdrawals to avoid disrupting compounding
      
• Cost Rationalisation Over Time: Use long-term holding to let charges taper, spreading early costs over more years, and reviewing fees periodically so the benefits outweigh what you pay.
  1. Some charges reduce as policy tenure increases
  2. Longer holding can improve the effectiveness of costs and outcomes
  3. Review charges and ensure benefits outweigh costs

ULIPs offer multiple fund categories so investors can align risk and return profiles. Choosing the right mix enhances ULIP benefits while preserving tax benefits where eligible.

• Equity Funds: Use equity funds when you want higher growth potential and can tolerate sharper ups and downs, ideally for long horizons with periodic rebalancing.
  1. Invest largely in equities for higher growth potential with higher volatility
  2. Suitable for long-term goals where you can ride out market cycles
  3. Best complemented with periodic rebalancing
      
• Debt Funds: Use debt funds to steady your portfolio, prioritising capital preservation and predictable income as you approach shorter goal horizons.
  1. Invest in bonds and money market instruments for stability and income
  2. Lower volatility than equity, helpful for capital preservation
  3. Useful as you near your goal horizon
      
• Balanced/Asset Allocation Funds: Balanced or asset allocation funds aim for a steady middle ground, combining equity and debt so you can pursue growth without taking on full equity-level volatility.
  1. Mix equity and debt to balance growth and stability
  2. Helpful for investors seeking a middle path on risk
  3. Can serve as a core holding for moderate profiles

Final Thoughts

ULIP can deliver a blend of protection and growth, with ULIP tax benefits that hinge on meeting Section 10(10D) conditions and efficient 80C usage. Keeping aggregate premiums within ₹2.5 lakh across policies preserves the potential ULIP tax exemption on maturity while retaining tax-free death benefits.​

Approach ULIP taxation proactively by partnering with a trusted insurer like Canara HSBC Life Insurance. Our ULIP solutions are backed by a strong Claim Settlement Ratio of 99.43% and transparent fund governance. We plan clear premium schedules to stay within eligibility thresholds and manage funds with a long-term, goal-based view. Ready to optimise protection and post-tax growth? Explore Canara HSBC Life Insurance ULIPs and start your plan today.