Most individuals make their tax-saving investments in the last few weeks leading to the end of the financial year on March 31. Those who leave it for the brink, end up investing in just about anything that helps them save tax, without really understanding what they are investing in.

One such product that investors end up investing in is a single-premium Unit-Linked Insurance Plan (Ulip). In a single-premium Ulip, as the name suggests, money has to be invested just once.

Under Section 80C of the Income Tax Act, investments into a Ulip can be claimed as a deduction from taxable income up to a maximum of Rs 1 lakh (Rs 100,000). But there is a slight catch to this, which most insurance companies do not tell you when they sell their insurance policies or is usually buried in the fine print.

As per subsection 3 of Section 80 C of Income Tax Act, a deduction is available only to so much of the premium which is not in excess of the 20% of the actual sum assured on the policy.

Lets try and understand what this means through an example of an individual who takes up a single premium insurance policy for Rs 1 lakh. He hopes that he will get the entire tax deduction of Rs 1 lakh, as is allowed under Section 80 C.

A Ulip has both investment and insurance features. A part of the premium is invested and another part goes towards paying the mortality charge for the insurance cover that an individual taking an Ulip receives.

As per current norms set by the nation's insurance sector regulator, the Insurance Regulatory and Development Authority, the minimum sum assured (the insurance cover that you have) in case of a single premium insurance policy, has to be 125% of the premium paid.

So if the premium paid is Rs 1 lakh, the minimum sum assured has to be Rs 1.25 lakh.

Now let's go back to what the subsection 3 of Section 80 C of Income Tax Act. It clearly points out that a deduction is available only to so much of the premium which is not in excess of the 20% of the actual sum assured. In this case, the single premium of Rs 1 lakh is 80% of the sum assured of Rs 1.25 lakh.

Hence, a tax deduction will not be available to an entire amount of Rs 1 lakh. A tax deduction of Rs 25,000, which is 20% of the sum assured, can be made.

So individuals opting for a single premium insurance policy and hoping to take the entire amount up to a maximum of Rs 1 lakh as a deduction should make sure that the sum assured on the policy is at least five times of the single premium paid. So if the single premium paid is Rs 1 lakh, then the sum assured has to be at least Rs 5 lakh (Rs 500,000). Rs 1 lakh is 20% of the sum assured of Rs 5 lakh. Hence, this ensures that the entire amount of Rs 1 lakh can be made as a tax deduction.

In case of most insurance policies the amount you get on maturity is tax-free. That may not be the case with single premium insurance policies.

Section 10(10D) of the Income Tax Act clearly points out that the amount at maturity is tax free only if the premium paid is less or equal to 20% of the sum assured. So, for a Rs 1 lakh policy on which the sum assured is Rs 1.25 lakh, the entire amount received on maturity will added on to the income for that year and taxed at the prevailing income tax rates.