Tax Planning With ULIPs: Leveraging Benefits Under Income Tax Act

ULIP insurance has always been a popular investment option in India, offering a combination of life insurance and investment opportunities. However, with the new tax amendments, there are some changes to be aware of. 

Understanding the New Taxation Rules for ULIP Insurance

Before the new tax amendments, returns from ULIP were not taxed if the annual investment did not exceed 10% of the life cover in the plan. However, now if the premium paid towards ULIPs exceeds Rs 2.5 lakh, the returns will be taxed.

The limit of Rs 2.5 lakh applies to the combined premium of all plans bought on or after February 1st, 2021. If you have started two ULIP investments after this date and the total annual premium exceeds Rs 2.5 lakh, both ULIPs will become taxable.

Restrictions on Fund Switches

In most ULIPs, there is a feature called fund switches that allow policyholders to shift between funds for potentially better returns. Previously, these switches were usually free; however, this may no longer be the case due to taxes on ULIPs.

The tax on fund switches will be determined based on the duration you have held the ULIP for. If it is less than three years, it will be charged at your income tax slab rate. If it is more than three years, it will be charged at a rate of 20%.

The type of funds held at the time of maturity also determines the tax rate under sections 112 and 112A of the Income Tax Act.

Tax Rules Regarding Death Benefit

The tax rules regarding the death benefit that your nominee will receive after your death remain unchanged. The death benefit is still exempt from tax under section 10(10D) of the Income Tax Act.

Taxation of ULIP Returns According to Fund Composition

The taxes you will pay on your ULIP returns depend on the funds chosen and their proportion in your policy. If the equity component of your funds is more than 65%, it will be taxed as an equity mutual fund. In the case of indirect equity investment through ETF, the equity should be 90% to be taxed as an equity mutual fund. Equity mutual fund investments enjoy long-term capital gains (LTCG) exemption up to Rs 1 lakh. Any amount above that will be subject to tax. 

Income earned from ULIPs falls under the long-term capital gain tax regime. To calculate the actual gain or loss, indexation is used. The Cost Inflation Index (CII) determines the base year and assigns different values for subsequent years based on inflation rates.

Tax Exemption Under Section 80C

The new tax amendments have not changed the deductions available under Section 80C. You can still avail of deductions of up to Rs 1.5 lakh towards the premium paid as per the rules under Section 80C. You must note that Section 80C includes deductions from the total of all your investments. 

ULIP Tax Benefits Beyond Section 80C

With the recent tax rules regarding ULIPs, there have been changes in the taxation of maturity benefits. If the premium paid in a year is less than Rs 2.5 lakh, the returns will be tax-free under section 10(10D). However, taxes will be applicable if the premium exceeds Rs 2.5 lakh in a year.

ULIP Maturity Taxability

ULIPs Starting Before February 1st, 2021: The amount received on maturity is tax-free as per section 10(10D) of the Income Tax Act if the annual premium is less than 10% of the sum assured. For ULIPs purchased before April 2012, a rate of 20% applies to maturity proceeds.

ULIPs Starting On or After February 1st, 2021: Returns from ULIPs will be taxed if the annual premium exceeds Rs 2.5 lakh. The tax on ULIP proceeds will be charged as capital gains based on the duration of holding. If returns exceed Rs 1 lakh, a tax rate of 10% applies for equity investments and 20% for others. Death benefits remain tax-exempt under the new taxation rules.

If you purchased ULIP before February 1st, 2021, you can still enjoy the benefits available before the new taxation rules. These rules apply only to policies purchased after February 1st, 2021. ULIPs offer a host of advantages, including tax benefits and the opportunity to combine life cover with investment growth. To understand how a ULIP can fit into your financial plan and maximise your income upon maturity, consider exploring a reliable ULIP calculator. It provides insights into potential returns based on different premium amounts and investment durations.


Tax planning with ULIPs requires a clear understanding of the new taxation rules and their impact on returns, fund switches, and maturity benefits. By leveraging the benefits offered under the Income Tax Act, you can optimise your tax savings while securing your family’s future. As you plan your financial journey, remember to consult with a trusted financial advisor or use resources like ULIP calculators to make informed decisions. By staying informed and proactive in your tax planning strategies, you can protect your wealth while achieving your long-term financial goals.

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