Ultimate Guide To Claiming Deductions On Unit Linked Insurance Plans

Key Takeaways

• A ULIP provides both life insurance coverage and investment opportunities in equity or debt funds, allowing wealth creation while ensuring financial security.

• ULIP premiums qualify for deductions up to ₹1.5 lakh under Section 80C, provided the premium does not exceed 10% (or 20% for older policies) of the sum assured and the policy is held for at least five years.

• Payouts are tax-free under Section 10(10D), except for policies with annual premiums exceeding ₹2.5 lakh (introduced in Budget 2021), which are taxed as capital gains under Section 112A.

A Unit-linked Insurance Plan (ULIP) is a type of insurance plan that extends the dual benefit of investment and a life cover to protect your family financially in case of an unfortunate event. The premium that you pay is divided into two parts. A part of this is contributed to your life cover and the remaining amount is invested in the funds of your choice.  Just like term life insurance, there are tax deductions on ULIP premiums and exemptions on proceeds after maturity. 

When you choose a ULIP, the insurance company invests part of the premium in shares/bonds etc., and the balance amount is utilised in providing an insurance cover. 

There are fund managers in the insurance companies who manage the investments, and switch your portfolio between debt and equity based on your risk appetite as well as the market’s performance. Therefore, you don’t have to worry about tracking your investments.

• Life Cover: It offers security for your family in case of emergencies like an untimely death, etc. For instance, in case of an emergency, you or your family will receive payouts based on the sum assured. 

• Income Tax Benefits: You’re eligible for a tax deduction on ULIP premiums under Section 80C. Additionally, the returns from the policy on maturity are exempt under Section 10(10D).

• Finance Long-Term Goals: If you have long-term goals like buying a house, a new car, marriage, etc., then ULIP is a good investment option because the money gets compounded.

• Flexibility to Switch Portfolio: As already mentioned, ULIPS are usually designed in a way that they allow you to switch your portfolio between debt and equity based on your risk appetite as well as your knowledge of how the market is performing.

ULIPs are categorised based on the following broad parameters of the funds that they invest in. They are:

• Equity Funds: Here the premium paid is invested in the equity market and thereby subject to higher risk.

• Balanced Funds: Where the premium paid is balanced between the debt and the equity market to minimise the risk for investors.

• Debt Funds: Where the premium is invested in debt instruments which carry a lower risk but in turn, also offer a lower return.

Unit Linked Insurance Plans, or ULIPs, are one of the most popular types of life insurance policies that offer long-term financial security along with tax benefits.

The tax deduction on ULIP premiums is the same as those applied to term life insurance plans. However, it is contingent on the condition that you continue to pay your premiums for the whole span of the lock-in period, which is at least 5 years in most cases.

The key points about deductions on ULIP premiums are:

• The deductions of ULIP premiums come under Section 80C of the Income Tax Act.

• The maximum limit on the deductions under Section 80C is ₹1.5 lakh, and this includes all the deduction claims, such as rent allowance, conveyance cost, etc., that are covered under this section.

• For policies issued before 31st March 2012, you can claim a deduction on the premium only if the premium is below 20% of the sum assured.

• For policies issued after 1st April 2012, you can claim a deduction on the premium only if the premium is below 10% of the sum assured.

• If you choose to discontinue the ULIP before five years, you are not entitled to claim the income tax deduction in the previous year. Also, the deduction on ULIP premiums you have already claimed in the preceding years will be considered as your income in the year you terminate the policy.

The Union Budget in 2025 has now clarified that ULIPs with annual premium over ₹2.5 lakh will be taxable as capital assets. Their redemption proceeds will be treated as capital gains and taxed under Section 112A. 

ULIPs that aren't exempt under Section 10 (10D) will now be considered capital assets and included under equity-oriented funds. Hence, any profit and gains from the redemption, for which tax exemption under Section 10(10D) does not apply, will be charged to tax as capital gains (sub-Section 1B of Section 45).

Just as it is in the case of term life insurance, all proceeds from ULIPs were exempted from taxation under Section 10D in two cases:

• Where the policy was issued before 31st March 2012, and premiums were lower than 20% of the sum assured.

• Where the policy was issued after 1st April 2012, and the premiums were lower than 10% of the sum assured.

However, The Union Budget in 2021 introduced a key amendment to Section 10(10D) of the Income Tax Act, 1961, which led to a change in the way high-value Unit-Linked Insurance Plans are taxed in India. As per the amendment, a high-value ULIP is defined as one which has an annual premium greater than ₹2.5 lakh in a year. If such ULIPs have been issued after 1st February 2021, the exemption provided to ULIP payouts under Section 10(10D) is not applicable.

Additionally, the Budget announcement included a special provision which is applicable to individuals who are paying premiums for multiple ULIPs. As per the updated rule, Section 10 (10D) benefit is also not applicable if the total annual premium paid by an individual holding multiple ULIP plans exceeds ₹2.5 lakh and the plans are issued after February 1, 2023.

It is essential to know that for you to get any deductions or exemptions on a ULIP under 80C or 10D, the plan must remain active for at least five years. For example, if you stop paying premiums for the plan during the fifth year, ULIP tax benefits availed in the first four years will be withdrawn. Hence, ensure that you have a long-term investment horizon and continue to pay the premiums for the entire paying term to benefit from ULIP taxation.

1. How do I claim tax deductions for ULIP premiums under Section 80C?

You can claim a deduction by submitting proof of the premiums paid towards the ULIP while filing the income tax returns.

2. What are the eligibility criteria for claiming ULIP tax deductions?

Any citizen of India, resident, or non-resident, can claim ULIP tax deductions while filing returns.

3. Can I claim ULIP deductions if I invest in multiple plans?

Yes, you can claim for deductions even if you invest in multiple plans, provided the total of the premiums paid does not exceed ₹2.5 lakh.

4. Are there any limits on the deductions for ULIP premiums under Section 80C?

Under Section 80C, for policies issued before 31st March 2012, you can claim a deduction on the premium only if the premium is below 20% of the sum assured. However, for policies issued after 1st April 2012, you can claim a deduction on the premium only if the premium is below 10% of the sum assured.

5. Can I claim ULIP deductions along with other 80C deductions?

Yes, you can claim deductions on ULIP premiums with other Section 80C deductions, provided the total does not exceed ₹1.5 lakh.

6. How does the maturity of a ULIP affect taxability?

You can claim a deduction on ULIP premiums and payouts only if you remain invested until maturity, i.e. at least 5 years. In case you already claimed a deduction in previous years on the premium and pulled out of the ULIP before maturity, all the claimed deductions will be taxed as income in the following tax year.

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