In the past, ULIPs (Unit Linked Insurance Plans) were simple: you put money in, saved on taxes, and got your profit tax-free. Today, ULIPs are still a great way to save on taxes, but the rules have changed. To get the best out of them, you need to understand three main checkpoints.
1. The Entry Point: Saving Tax on Your Investment
When you start a ULIP, the government lets you reduce your taxable income.
- The Benefit: You can claim a deduction of up to ₹1.5 Lakh every year under Section 80C.
- The Rule: To get this benefit, your annual premium must be less than 10% of your total life cover. For example, if you pay ₹1 Lakh a year, your life cover (Sum Assured) must be at least ₹10 Lakh.
2. The Middle Phase: Shifting Your Money for Free
This is a superpower that ULIPs have over Mutual Funds.
- How it works: You can move your money between "High Risk" (Equity/Stocks) and Safe (Debt/Bonds) funds whenever you want.
- The Tax Edge: Usually, when you sell stocks to buy bonds, you have to pay a Capital Gains Tax. But in a ULIP, these switches are 100% free. This helps your wealth grow much faster because no tax is being deducted from your profits.
3. The Exit Point: Getting Your Money Back
This is where the new rules (from the 2021 and 2025 budgets) come in. Whether your final payout is tax-free depends on how much you invest:
- The ₹2.5 Lakh Limit: If your total annual investment in ULIPs is ₹2.5 Lakh or less, your entire maturity amount stays 100% tax-free.
- Above ₹2.5 Lakh: If you invest more than this, your profit will be treated like a Mutual Fund. You will have to pay a 12.5% tax on your long-term gains (as per the latest 2025 rules).
- The Safety Net: No matter how much you invest, if the policyholder passes away, the money given to the family (Death Benefit) is always 100% tax-free.
Why ULIPs Are Still a Top Pick In 2025?
With taxes increasing on other popular investments (like ELSS), a ULIP remains one of the few ways left in India to build a large amount of wealth and withdraw it without giving a single rupee to the tax department—provided you stay within the ₹2.5 Lakh annual limit.