ULIP Tax
Exempt or Taxed as Capital Gains?
How Unit Linked Insurance Plans are taxed — the Section 10(10D) maturity exemption, the ₹2.5 lakh annual-premium threshold from 1 Feb 2021, LTCG at 12.5% and STCG at 20% on high-premium ULIPs, and the always-exempt death benefit.
A ULIP maturity is exempt under Section 10(10D) only if the annual premium stays within ₹2.5 lakh (aggregate across all ULIPs issued on/after 1 Feb 2021) and does not exceed 10% of the Sum Assured. If the premium exceeds ₹2.5 lakh, the ULIP is taxed like an equity mutual fund — LTCG at 12.5% above ₹1.25 lakh (held over 12 months) or STCG at 20%. The death benefit is always fully tax-free, with no premium condition.
Section 10(10D) — When ULIP Maturity Is Tax-Free
Section 10(10D) of the Income-tax Act exempts sums received under a life insurance policy, including ULIP maturity, only when every condition below is met. If any fails, the maturity is taxable.
| Condition | Requirement |
|---|---|
| Premium-to-Sum-Assured | Annual premium ≤ 10% of Sum Assured (policies after 1 Apr 2012; 20% for older policies) |
| Aggregate ULIP premium | ≤ ₹2.5 lakh/yr across all ULIPs issued on/after 1 Feb 2021 |
| Effect if premium > ₹2.5L | Not exempt — taxed as capital gains (equity-fund framework) |
| Effect if premium > 10% of SA | Not exempt — proceeds taxable |
| Death benefit | Always exempt — no premium or SA condition |
The ₹2.5 lakh threshold is a combined annual figure across all your post-1-Feb-2021 ULIPs, not per policy. Verified on incometax.gov.in for FY 2025-26 (AY 2026-27).
ULIPs bought before 1 Feb 2021 stay exempt on maturity as long as the premium is within 10% of the Sum Assured — the ₹2.5 lakh cap does not apply to them. The ₹2.5 lakh capital-gains rule (added by the Finance Act 2021 and clarified in Budget 2025) applies only to policies issued on or after 1 Feb 2021.
The ₹2.5 Lakh Rule — Taxed Like Equity
When a post-1-Feb-2021 ULIP with aggregate annual premium above ₹2.5 lakh matures or is surrendered, it is treated as an equity-oriented fund and the gain is taxed as capital gains under the same rules as an equity mutual fund — Section 112A for long-term and Section 111A for short-term.
STCG — held ≤ 12 months
- Taxed under Section 111A at a flat 20%
- Rare for ULIPs — most have a 5-year lock-in
- No ₹1.25 lakh exemption for short-term gains
- Applies to units redeemed within 12 months
LTCG — held > 12 months
- Taxed under Section 112A at 12.5%
- First ₹1.25 lakh of gains each year is exempt
- The usual case — ULIP term is 5+ years
- No indexation benefit is available
Cost of acquisition: the premiums paid (net of amounts allocated to the pure insurance/mortality cover) are treated as the cost. The insurer deducts TDS on taxable ULIP proceeds before payout, and you report the gain in Schedule CG of your ITR-2.
If you hold two post-2021 ULIPs at ₹1.5 lakh each, the combined ₹3 lakh premium breaches the ₹2.5 lakh threshold and both fall out of the 10(10D) exemption. CBDT rules decide which policies stay exempt where only some are within the limit — get the aggregation checked before assuming a maturity is tax-free.
How a High-Premium ULIP Is Taxed
Suppose you bought a ULIP in FY 2021-22 with an annual premium of ₹3 lakh (above the ₹2.5 lakh cap). It matures after 10 years; total premiums paid = ₹30 lakh, maturity value = ₹34.25 lakh, so the long-term gain is ₹4.25 lakh.
112A LTCG on the ULIP
If premium were ₹2.5L or less
Add 4% health & education cess on the tax. Estimate your liability with the income-tax calculator. The same equity-fund logic and 12.5% rate is explained in our Section 112A guide.
Your ULIP maturity is likely tax-free if
- Aggregate annual premium is within ₹2.5 lakh
- Premium is within 10% of the Sum Assured
- It is a death claim (always exempt)
- Policy was issued before 1 Feb 2021 (10% SA rule only)
It is taxable as capital gains if
- Aggregate premium crosses ₹2.5 lakh (post-2021 policy)
- Premium exceeds 10% of the Sum Assured
- You surrender during the 5-year lock-in
- You expected a fully tax-free payout by default
80C Deduction, GST & Surrender
ULIP premiums qualify for deduction under Section 80C up to ₹1.5 lakh a year (shared with PPF, ELSS, LIC, home-loan principal, etc.), but only where the premium is within 10% of the Sum Assured and only under the old tax regime — the new regime allows no 80C.
- GST on charges: fund management, mortality, policy-administration and allocation charges carry 18% GST, which reduces your investible corpus and is not income-tax deductible.
- Surrender within 5 years (lock-in): the fund value moves to a discontinued-policy fund earning ~4% and is paid only after the 5-year lock-in; if 10(10D) conditions are not met, it is taxable in the year of receipt.
- Surrender after 5 years: tax-free if the 10(10D) conditions (≤10% of SA and ≤₹2.5 lakh premium for post-2021 ULIPs) are satisfied; otherwise capital-gains tax applies.
If you buy a large ULIP (over ₹2.5 lakh/yr) mainly for tax savings, note the 80C benefit is capped and shared, and the maturity is now taxable as capital gains. Post-2021 the tax efficiency of big-ticket ULIPs is much lower than before — compare against a plain equity mutual fund plus term insurance.
Not sure if your ULIP maturity is exempt or taxable? Get the aggregation and capital gains checked.
File ITR with a CA →Frequently Asked Questions
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