The tax on ULIP differs slightly depending on whether you choose a single premium or a regular premium plan. For both, premiums qualify for tax deductions under Section 80C (up to Rs. 1.5 lakh/year), but conditions apply. If the annual premium exceeds Rs. 2.5 lakh, the maturity amount becomes taxable — this rule is applicable from 1st Feb 2021 onwards.
In single premium plans, the entire premium is paid upfront and is considered for the Rs. 2.5 lakh threshold in that financial year. Regular premium ULIPs assess this annually. Regardless of type, tax benefits continue on the life cover under Section 10(10D) if conditions are met.
Are the top-up premiums in ULIPs eligible for tax benefits?
Yes, but with caution. Top-up premiums in ULIPs can enjoy tax benefits under Section 80C and Section 10(10D) if the total premium (including top-up) stays within the Rs. 2.5 lakh annual limit. If this threshold is crossed, the tax on ULIP maturity proceeds becomes applicable.
Also, for top-ups to remain tax-exempt, the sum assured must be at least 10 times the premium. It’s best to check the updated guidelines or consult a financial expert before making large top-up contributions.
How does ULIP taxation affect NRIs investing in India?
ULIPs can be a smart investment choice for NRIs too. The tax on ULIP for NRIs is the same as for resident Indians — deductions under Section 80C and tax-free maturity under Section 10(10D) apply if premium limits are maintained. However, NRIs should be aware of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
If the maturity amount is taxable, NRIs may face TDS (Tax Deducted at Source) in India. Therefore, it's important for NRIs to declare their residential status correctly and consult a tax expert while filing returns.
Is there a lock-in period for ULIPs to claim tax benefits?
Yes. To enjoy tax advantages, ULIPs come with a mandatory lock-in period of five years. During this time, you cannot make withdrawals or surrender the policy. This rule ensures ULIPs are used for long-term wealth creation, not short-term gains.
If you exit before five years, the tax on ULIP benefits claimed under Section 80C may be reversed, and the surrender proceeds will be taxable. Staying invested for the full term is key to enjoying all tax benefits without any penalties.
What happens to the tax benefits if the ULIP policy is surrendered early?
If you surrender your ULIP before completing 5 years, any tax deductions claimed earlier under Section 80C get reversed in the year of surrender. That means the tax on ULIP benefits previously enjoyed will now become payable.
Also, the surrender value becomes fully taxable as income in the year of withdrawal. To avoid this, it’s wise to stay invested for at least the lock-in period — and ideally, for the full policy term to maximise both tax efficiency and returns.
Can ULIP tax benefits be claimed under the new tax regime?
Under the new tax regime, introduced in Budget 2020, most exemptions and deductions — including those under Section 80C — are not available. So, if you opt for the new regime, you cannot claim tax benefits on ULIP premiums.
However, the maturity benefit of ULIPs may still be tax-free under Section 10(10D) if the total annual premium stays within Rs. 2.5 lakh. If you want to enjoy full tax savings on ULIPs, the old tax regime remains the better choice.
How are fund switches within ULIPs taxed?
One of ULIP’s major advantages is free fund switching, and the good news is — it’s not taxed. Whether you move from equity to debt or vice versa, no capital gains tax is applied at the time of switching.
This makes ULIPs ideal for market-savvy investors who want to adjust portfolios without triggering taxation. However, the tax on ULIP maturity proceeds will still depend on overall premium limits and conditions under Section 10(10D). So, switch smartly — but stay within premium thresholds.
How does ULIP taxation compare to mutual funds and ELSS?
ULIPs, mutual funds, and ELSS all offer market-linked returns, but their tax treatment differs. ULIPs offer tax-free maturity under Section 10(10D) if premiums are within Rs. 2.5 lakh annually. In contrast, mutual funds and ELSS are subject to capital gains tax (10% on LTCG above Rs. 1 lakh annually).
Additionally, ULIPs allow tax-free switching, whereas mutual fund rebalancing can trigger tax events. So, in terms of tax on ULIP, they often offer better long-term efficiency — especially for investors looking for insurance with returns.