ULIP Taxation

In summary

ULIPs offer life insurance and market-linked investment in one plan, along with certain tax benefits. However, the tax treatment depends on your policy, premium amount and tax regime.

• Premium deduction: Eligible ULIP premiums can qualify for a deduction of up to Rs. 1.5 lakh a year under Section 123, subject to applicable conditions and the old tax regime.
• Maturity proceeds: ULIP maturity benefits may be tax-exempt under Section 11 read with Schedule II, subject to premium limits and conditions.
• Capital gains tax: ULIPs exceeding the applicable premium threshold may be taxed on gains under capital gains rules.
• Partial withdrawals: Withdrawals after the applicable lock-in period may have specific tax treatment depending on the policy and withdrawal conditions.
• Death cover: Amounts received on death are generally subject to separate tax provisions.

The main tax provisions are:

• Premium deduction: Qualifying ULIP premiums can be included within the Rs. 1.5 lakh aggregate deduction under Section 123 read with Schedule XV.
• Maturity exemption: Eligible ULIP receipts can be excluded from total income under Section 11 read with Schedule II when the prescribed conditions are met.
• Capital gains treatment: A ULIP receipt that does not qualify for the Schedule II exemption is taxable as capital gains under Section 45(5).
• Death cover: The premium-limit conditions for the exemption do not apply to a sum received on the death of the insured person.

Tax treatment therefore depends on the policy's issue date, premium amount, sum assured and the nature of the amount received.

For life insurance policies issued on or after April 1, 2012, the qualifying premium for the deduction is generally restricted to 10% of the actual capital sum assured. A 15% limit applies in specified cases involving a person with a disability, severe disability, or certain specified diseases or ailments.

The Rs. 1.5 lakh limit is an aggregate limit for eligible deductions covered by Section 123. You cannot treat the Rs. 1.5 lakh as a separate deduction exclusively for ULIPs.

For a ULIP issued on or after February 1, 2021, the exemption requires both of these conditions:

• The premium-to-actual-capital-sum-assured ratio must generally not exceed 10%. A 15% limit applies to specified special policies.
• The aggregate premium payable across all such ULIPs issued on or after February 1, 2021 must not exceed Rs. 2.5 lakh in any tax year during the term of the policies.

The Rs. 2.5 lakh test applies across the relevant ULIPs, not separately to each policy. The premium-cap condition does not apply to amounts received on death.

For policies issued before February 1, 2021, the Rs. 2.5 lakh ULIP premium cap does not apply. The applicable premium-to-sum-assured conditions for the policy's issue period continue to matter.

• Tax deduction on premiums:

A qualifying premium can form part of the Rs. 1.5 lakh deduction under Section 123, subject to the applicable conditions and tax regime.

• Tax on non-exempt ULIP receipts:

When an amount received from a ULIP is not exempt under Schedule II, Section 45(5) treats the resulting profits or gains as capital gains in the tax year in which the amount is received. Rule 8AD prescribes the method for computing the gain.

This means you should not assume that an entire maturity or withdrawal amount becomes taxable merely because the policy is outside the exemption. The taxable amount is the capital gain computed under the prescribed rules.

• Current capital gains treatment:

The Income Tax Act, 2025 includes a non-exempt ULIP within the capital-asset framework. For a non-exempt ULIP scheme that qualifies as an equity-oriented fund under Section 198, long-term capital gains above Rs. 1.25 lakh are taxed at 12.5%, subject to the applicable statutory conditions.

The earlier 10% LTCG rate above Rs. 1 lakh stated in the source article is no longer current. The capital-gains framework was changed from July 23, 2024, and the corresponding ULIP treatment applies under the new Act from April 1, 2026.

• Rs. 2.5 lakh aggregate premium condition: For relevant ULIPs issued on or after February 1, 2021, the aggregate premium across such policies must stay within Rs. 2.5 lakh in a tax year for the applicable exemption.
• 10% premium-to-sum-assured condition: The general qualifying limit for policies issued on or after April 1, 2012 is 10% of the actual capital sum assured.
• Special-policy limit: The premium-to-sum-assured limit can be 15% for specified policies covering a person with a disability, severe disability or specified disease or ailment.
• Five-year lock-in: ULIPs have a minimum five-year policy term under the applicable IRDAI framework.
• Non-exempt receipts: Amounts that do not qualify for the life insurance exemption can be taxed under capital gains provisions.

A key point is that the Rs. 2.5 lakh limit is an exemption condition, not a Rs. 2.5 lakh deduction under the premium-deduction provision.

The tax treatment depends on whether the policy qualifies for exemption under Section 11 read with Schedule II.

• If the relevant receipt qualifies for exemption, the applicable exemption conditions determine the tax outcome.
• If the ULIP is a specified non-exempt policy, the amount received can be taxed as capital gains under Section 45(5), with the gain calculated under Rule 8AD.
• A 20% of fund value withdrawal limit should not be described as a blanket tax-free threshold.

This corrects the source article's statement that a withdrawal is automatically tax-exempt when it is within 20% of the fund value.

• Surrender before the five-year period:

The five-year lock-in is a product and regulatory requirement. Where a qualifying investment is discontinued before the prescribed period, earlier deductions claimed under the applicable life insurance deduction provisions can be reversed according to the law.

A non-exempt ULIP receipt can also fall under the capital-gains provisions applicable to specified ULIPs.

• Surrender after the lock-in period:

Surrender after five years does not automatically make the proceeds tax-free. The relevant question is whether the receipt qualifies for exemption under Section 11 read with Schedule II.

If the ULIP does not qualify for that exemption, Section 45(5) applies and the gain is calculated under Rule 8AD.

• Check the aggregate premium:

For ULIPs issued on or after February 1, 2021, track the aggregate premium across relevant ULIPs rather than checking each policy separately. The exemption condition uses a combined Rs. 2.5 lakh threshold.

• Check the premium-to-sum-assured ratio:

For policies issued on or after April 1, 2012, check whether the premium remains within the applicable percentage of the actual capital sum assured. This condition affects both premium deductions and the exemption framework.

• Consider your tax regime:

Section 123 deductions are not available under the new concessional tax regime. Therefore, do not assume that paying a ULIP premium automatically reduces your taxable income.

• Understand the capital-gains outcome:

A high-premium ULIP that falls outside the exemption can be taxed under capital gains provisions. For an equity-oriented non-exempt ULIP covered by Section 198, LTCG above Rs. 1.25 lakh is taxed at 12.5%, subject to the applicable conditions.

The tax treatment should be considered along with the insurance cover, policy charges, investment risk and your financial goals.

• Life insurance premiums could qualify for a combined deduction of up to Rs. 1.5 lakh under Section 80C, subject to conditions.
• The ULIP maturity exemption was governed by Section 10(10D).
• For relevant ULIPs issued on or after February 1, 2021, the aggregate premium condition was Rs. 2.5 lakh.
• Non-exempt ULIP amounts were subject to the capital-gains framework.
• The five-year ULIP lock-in continued to apply under the insurance regulations.

The Rs. 2.5 lakh threshold was not a Rs. 2.5 lakh deduction under Section 80C. It was a condition for the Section 10(10D) exemption for specified ULIPs.

The important changes and clarifications are:

The relevant ULIP exemption threshold remains Rs. 2.5 lakh for the applicable post-February 1, 2021 policies.

Finance Act 2025 also amended the capital-gains framework so that non-exempt ULIPs are included within the equity-oriented-fund definition where the prescribed investment conditions are met, effective April 1, 2026.

The policy therefore separated ULIPs qualifying for the life insurance exemption from higher-premium ULIPs that fall outside that exemption.

The later 2025 amendment aligned the treatment of non-exempt ULIPs with the capital-gains framework for equity-oriented funds, with the change applying from April 1, 2026.

For a non-exempt ULIP scheme that qualifies as an equity-oriented fund under Section 198, long-term capital gains exceeding Rs. 1.25 lakh are taxed at 12.5% under the current framework.

The earlier rate of 10% on gains above Rs. 1 lakh is no longer the current rate for this category.

The equity-oriented classification has specific statutory conditions, including prescribed equity allocation levels that must be maintained by the insurance-company scheme.

If the ULIP does not qualify for the exemption, the amount received can give rise to capital gains under Section 45(5). The gain is calculated according to Rule 8AD rather than treating the entire maturity amount as taxable income.

For an equity-oriented non-exempt ULIP, the current long-term capital gains rate is 12.5% on gains exceeding Rs. 1.25 lakh, subject to Section 198.

For example, if the taxable long-term capital gain eligible for Section 198 is Rs. 2 lakh, the amount above the Rs. 1.25 lakh threshold is Rs. 75,000. At 12.5%, the tax on that portion is Rs. 9,375 before applicable surcharge and cess.

Therefore, a death cover can remain exempt even where the ULIP does not satisfy the Rs. 2.5 lakh aggregate premium condition that applies to non-death receipts.

The exact tax position can still depend on the nature of the policy and the statutory conditions. Keyman insurance policies are specifically excluded from the Schedule II exemption.

Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services. Please consult your advisors.

For relevant ULIPs issued on or after February 1, 2021, the aggregate premium condition for the exemption remains Rs. 2.5 lakh. Qualifying premiums can fall within the Rs. 1.5 lakh Section 123 deduction, subject to conditions and the old tax regime. Non-exempt ULIPs are taxed under capital-gains provisions, with equity-oriented ULIPs subject to 12.5% LTCG tax above Rs. 1.25 lakh under Section 198, subject to the applicable conditions.

Understanding these rules can help you distinguish the tax treatment of premiums, maturity proceeds, withdrawals, surrender values and death covers before investing in a ULIP.

Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services. Please consult your advisors.