How ULIPs help you save tax in 2026: A complete guide to ULIP tax deductions

Every financial year, the same question resurfaces as March 31 approaches: where can you invest to save tax without giving up the chance to grow your money? In 2026, with the new Income-tax Act, 2025 now in force and the Insurance Regulatory and Development Authority of India (IRDAI) continuing to tighten disclosure and charge norms on unit-linked products, that question has a more nuanced answer than it did a few years ago.

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Is ULIP a good investment for tax saving?

Yes. A ULIP can be a tax-efficient investment option, but the benefits come with certain conditions. Depending on your tax regime and how your policy is structured, you may get tax benefits at three stages under the Income Tax Act 2025:

• When you pay your premium
• When you receive the maturity benefit, and
• When your nominee receives the death benefit

Can I claim a tax deduction on my ULIP premium?

Yes, if you are under the old tax regime and meet the applicable conditions, your ULIP premium can qualify for a deduction of up to ₹1.5 lakh a year under Section 123 of the Income Tax Act 2025 (previously Section 80C).

For example:
Suppose your annual ULIP premium is ₹1.2 lakh and you are eligible to claim the deduction. You may be able to claim ₹1.2 lakh as a deduction under Section 123, provided you have not already exhausted your overall ₹1.5 lakh limit through other eligible investments.

How much tax can I save on my ULIP premiums?

That depends on your tax slab. For example, if you are eligible for the full ₹1.5 lakh deduction and fall in the 30% tax bracket, the deduction could reduce your tax liability by approximately ₹45,000, before considering applicable cess and other factors. However, remember that ₹1.5 lakh is the maximum overall deduction under Section 123 of the Income Tax Act 2025 (previously Section 80C), not a separate ₹1.5 lakh limit for ULIPs.

Is the maturity amount I receive from a ULIP tax-free?

It can be subject to the applicable conditions. For ULIPs issued on or after February 1, 2021, this tax exemption is available when the annual premium does not exceed 10% of the sum assured and your total annual premium across all ULIPs does not exceed ₹2.5 lakh.

For example: If you pay an annual premium of ₹2 lakh and the premium is within 10% of the sum assured, the maturity amount can be received tax-free, provided the other applicable conditions are also met.

If your total annual ULIP premium exceeds ₹2.5 lakh, or the premium exceeds the applicable 10% of sum assured limit, the maturity proceeds may not qualify for this exemption, and the gains may be taxed under the applicable capital gains provisions.

What happens if my ULIP maturity amount is not tax-exempt?

If your ULIP does not meet the conditions for tax exemption, the investment gains may be taxable when you receive the maturity amount. The important point is that you are not taxed on the entire maturity amount. Tax is applicable to the gain or profit earned on your investment, as per the applicable tax rules. From April 1, 2026, such gains from ULIPs are taxed under the applicable capital gains provisions.

For example, if you have paid ₹10 lakh in premiums and your ULIP is worth ₹14 lakh at maturity, your gain is ₹4 lakh. If the maturity proceeds do not qualify for tax exemption, the applicable tax would be considered on this gain, not on the entire ₹14 lakh. For qualifying long-term gains, the applicable tax rate is 12.5%, subject to the relevant exemption threshold and other applicable provisions.

Will my nominee have to pay tax on the ULIP death benefit?

Generally, the death benefit received by the nominee is exempt from tax, subject to the applicable provisions. This is different from the maturity benefit, which is subject to specific conditions for tax exemption. So, the tax treatment of a ULIP death benefit should not be confused with the rules applicable to maturity proceeds.

What should I check if I'm buying a ULIP specifically for tax benefits?

Before investing, look at these key points:

• Check your tax regime: The Section 123 premium deduction is available under the old tax regime.
• Check your existing deductions: Your ULIP premium shares the overall ₹1.5 lakh Section 123 limit with your other eligible investments.
• Check the premium and sum assured: The applicable 10% condition can affect the tax treatment.
• Check your total ULIP premiums: If you want the maturity proceeds to qualify for tax exemption, check your aggregate annual premiums across ULIPs against the applicable ₹2.5 lakh threshold.
• Check the policy issue date: Different tax provisions can apply depending on when the ULIP was issued.
• Check the tax treatment if the exemption doesn't apply: The gains may be subject to the applicable capital gains provisions.