ULIP Maturity Tax

Table of Content

1. What is ULIP Maturity Tax?

2. Who Pays Tax on ULIP Maturity?

3. How Section 11 read with Schedule II of the Income Tax Act, 2025 Can Help You Save Tax on ULIPs

4. Tax on High-Value ULIP Policies

5. Conclusion

6. Frequently Asked Questions

What is ULIP Maturity Tax?

Understanding how the ULIP maturity tax works is important because the tax treatment depends on specific policy conditions and premium limits. According to the Income Tax Act of India, 2025, Section 11 read with Schedule II (Corresponding to Section 10(10D) of the Income Tax Act, 2025) governs whether ULIP maturity proceeds qualify for tax exemption. If the ULIP satisfies the prescribed conditions, the maturity amount, including investment gains, remains fully tax-free. 

For policies issued on or after 1st April 2012 (but before 1 February 2021) , the maturity proceeds received under a ULIP policy shall remain fully exempt from tax if the annual premium does not exceed 10% of the sum assured. In respect of policies issued prior to 1 April 2012, the aforesaid threshold is 20% of the sum assured, as prescribed.

For ULIP policies issued on or after 1 February 2021, this exemption under Section 11 read with Schedule II of the Income Tax Act, 2025 shall apply only when the total annual premium paid across all ULIPs does not exceed ₹2.5 lakh and the annual premium does not exceed 10% of the sum assured, pursuant to the amendments introduced by the Finance Act, 2021. Policies issued before this date continue to follow earlier exemption rules linked to the sum assured requirement.

When the premium threshold exceeds ₹2.5 lakh, the tax on ULIP maturity becomes applicable. In such cases, ULIPs are treated similarly to equity-oriented mutual funds because a major portion of their investments is allocated to equities. In such cases, the maturity proceeds shall be taxable under the head “Capital Gains” and the gains shall be chargeable to tax as Long-Term Capital Gains at the rate of 12.5% on gains exceeding ₹1.25 lakh in a financial year, in accordance with Section 198 of the Income Tax Act, 2025.  (Corresponding to Section 112A of the Income Tax Act, 1961) and the manner prescribed thereunder. 

Who Pays Tax on ULIP Maturity?

• Taxation for Indian Residents

For Indian residents, taxation on ULIP maturity depends mainly on whether the policy qualifies for exemption under Section 10(10D). If your annual premium stays within the prescribed limits and you meet the other prescribed conditions as per the Income Tax Act, 1961, you receive the entire maturity amount tax-free. However, for high-value ULIPs with a yearly premium exceeding ₹2.5 lakh (for policies issued on or after 1 February 2021), the gains on maturity are taxable  under the head “Income from capital gains” as Long-term Capital Gains (LTCG) at 12.5% over the gains of ₹1.25 lakhs. Budget 2025 has offered more clarity on ULIP taxation rules by stating that non-exempt ULIPs shall always be  taxed as “capital gains” and not “income from other sources”. Death benefits continue to be completely tax-free.

Higher-income individuals are more likely to cross this premium threshold, making them liable to pay tax on the investment gains. In contrast, lower-income earners with smaller premium payments often remain exempt from these fees.

• Taxation for NRIs

NRIs follow the same ULIP maturity tax rules as resident Indians, including exemption conditions under Section 10(10D)¹ of the Income Tax Act, 1961. However, NRIs may be subject to TDS (Tax Deducted at Source) under Section 195 on taxable ULIP maturity payouts. Death benefits still remain tax-free. If the policy qualifies for exemption, no TDS is deducted. Taxability in India also depends upon the DTAA entered between India and the resident country of the policyholder.

When taxable, the insurer deducts TDS based on the applicable capital gains rate. NRIs can later claim credit or a refund when filing their income tax return in India. Thus, while the tax structure remains uniform, the compliance process differs due to TDS requirements.

• Impact of Employment Type

For salaried individuals, ULIP maturity tax simply adds to their total taxable income when capital gains apply. The calculation remains straightforward, and exemptions depend solely on the policy structure. 

However, business owners may have varying cash flows and often invest in higher-premium ULIPs, increasing the likelihood of taxable maturity amounts

• Special Considerations

Policyholders must ensure their ULIP meets the exemption criteria to avoid tax liability. By understanding premium thresholds, residency-related TDS rules, and income-linked implications, individuals can better plan for the taxability of ULIP on maturity. These factors play an important role in long-term financial planning.

How Section 11 read with Schedule II of the Income Tax Act, 2025 Can Help You Save Tax on ULIPs

Section 11 read with Schedule II of the Income Tax Act, 2025 allows ULIP maturity tax benefits by making maturity proceeds tax-free when specific conditions are satisfied. This exemption differs from Section 123 read with Schedule XV of the Income Tax Act, 2025 (corresponding to Section 80C of the Income Tax Act, 1961), which provides a tax deduction of up to ₹1.5 lakh on premiums paid in a tax year. Section 11 focuses on whether the final maturity amount qualifies for exemption.

For ULIPs issued after 1 April 2012, the annual premium must not exceed 10% of the sum assured. For policies issued before that date, the limit is 20% of the sum assured. Additionally, for ULIPs issued after 1 February 2021, the combined annual premium across all ULIPs must remain within ₹2.5 lakh in a tax year along with the sum-assured ratio.

Investors must meet all these conditions together to qualify for tax-free maturity benefits. If they violate any condition, tax authorities may treat the ULIP maturity amount as taxable under the applicable capital gains tax rules as per the Income Tax Act, 2025.

• Numerical Example on How to Save Tax on ULIP Maturity

Suppose an investor buys a ULIP with an annual premium of ₹1.5 lakh, which is within the permitted limit for tax exemption. The policy remains active for the full term and meets all Section 10(10D) conditions, including the required life cover.

After 10 years, the ULIP matures with a fund value of ₹12 lakh.

Total Premiums Paid:  ₹1.5 lakh × 10 years = ₹15,00,000

Maturity Amount Received:  ₹12,00,000

Note: Since this policy meets Section 10(10D)¹ rules, the entire ₹12 lakh received is 100% tax-free.

If this policy had been taxable, an investor would have been required to pay ULIP maturity tax on the gains. However, because it qualifies for exemption, both the investment amount and returns are protected from tax, maximising overall wealth.

This example shows how staying within the premium threshold and meeting policy conditions can help investors enjoy significant tax savings on ULIP maturity.

• Practical Tips on How to Save Tax on ULIPs

Here are some practical tips on how to save tax on ULIPs:

• Maintain Annual Premiums Within Limits: Keep annual premiums within the permissible limits to ensure your ULIP qualifies for tax exemption at maturity.

• Keep Your Policy Active for a Full Term: The policy must remain active and should not be surrendered before the mandatory five-year lock-in period has expired.

• Ensure Adequate Life Cover: The life cover must meet the required multiple of the annual premium during the whole tenure of the policy to remain eligible for Section 10(10D)¹ benefits as per the Income Tax Act, 1961.

• Retain All Premium Payment Records: Keep all premium payment receipts and documents safely, as they help you easily claim tax exemption when the ULIP matures.

Note: For ULIPs issued on or after 1 February 2021, the annual premium must not exceed ₹2.5 lakh to qualify for exemption and the premium should exceed 10% of the sum assured.

Tax on High-Value ULIP Policies

High-value ULIP policies are subject to different tax rules compared to standard ULIPs. Such high-value policies include those with annual premiums exceeding ₹2.5 lakh, issued on or after 1 February 2021. 

These policies may not qualify for the full ULIP maturity tax exemption under Section 10(10D), which means the maturity proceeds are taxable. The government introduced this rule to discourage the use of ULIPs purely as high-value investment vehicles rather than balanced insurance–investment products.

• Tax Treatment of Maturity Proceeds

When a ULIP exceeds the ₹2.5 lakh annual premium threshold, the policy becomes a non-exempt ULIP for the purposes of Section 10(10D) of the Income Tax Act, 1961. Accordingly, tax rules treat it as a capital asset and tax its maturity gains in the same way as equity-oriented mutual funds as per the special provisions introduced under Section 112A of the Income Tax Act, 1961. This means that only the profits, not the full maturity amount, are subject to taxation.

• Long-Term Capital Gains Tax Rules

Long-term capital gains (LTCG) exceeding ₹1.25 lakh in a financial year are subject to a 12.5% tax without indexation. It is important to understand the concept of financial year vs assessment year, as capital gains are calculated in the financial year in which the ULIP matures, while tax filing and reporting happen in the relevant assessment year. You must deduct the total premiums paid over the policy tenure from the maturity value to calculate the taxable gains.

• Tax Calculation Example 1 (High-Value Policy)

Suppose an investor pays an annual premium of ₹4 lakh for 10 years, totalling ₹40 lakh, and the ULIP matures at ₹55 lakh.

Taxable Capital Gain = ₹55,00,000 – ₹40,00,000 = ₹15,00,000

Taxable LTCG = ₹15,00,000 – ₹1,25,000 (₹1.25 lakh exemption) = ₹13,75,000

Tax Payable = 12.5% of ₹13,75,000 = ₹1,71,875(plus cess).

• Tax Calculation Example 2 (Very High Premium)

If annual premiums total ₹3 lakh for 7 years (₹21 lakh overall) and the policy matures at ₹30 lakh:

Taxable Gain = ₹30,00,000 – ₹21,00,000 = ₹9,00,000

Taxable LTCG = ₹9,00,000 – ₹1,25,000 = ₹7,75,000

Tax Payable = 12.5% of ₹7,75,000 = ₹96,875.

Hence, high-value ULIPs can still be rewarding, but investors must factor in capital gains tax when premiums exceed ₹2.5 lakh annually. Understanding these implications helps plan investments more effectively and avoid unexpected tax liabilities.

Conclusion

The applicability of the ULIP maturity tax depends entirely on whether the policy satisfies the conditions for exemption under Section 11 read with Schedule II of the Income Tax Act, 2025. The key deciding factors include the premium-to-sum-assured requirement and the ₹2.5 lakh annual premium threshold introduced for ULIPs issued after 1 February 2021.

When investors fulfil all prescribed conditions, they receive ULIP maturity proceeds completely tax-free, with no additional tax liability. However, if they exceed the premium limit or fail to meet the exemption conditions, tax authorities treat the gains as taxable under equity-oriented capital gains rules.

Understanding these rules before investing can help investors choose ULIPs more strategically and avoid unexpected tax implications at maturity.

Frequently Asked Questions

1. What happens when an ULIP matures?

When a ULIP matures, the policyholder receives the accumulated fund value, which includes invested premiums and market-linked returns. Understanding the unit linked insurance plan meaning is important, as it is a market-linked life insurance product that combines investment and insurance benefits. Unlike fixed income plans, ULIPs do not offer guaranteed returns, as payouts depend on market performance. Depending on the premium limits and Section 10(10D) eligibility, the payout may be tax-free or taxable under the head “Income from Capital Gains”. The policy terminates unless it offers an option to extend the investment.

2. Is ULIP maturity fully taxable?

No, the maturity of a ULIP is not fully taxable. It is tax-free under Section 10(10D)¹ if the annual premium stays within the prescribed limits as per the Income Tax Act, 1961. If your premium exceeds ₹2.5 lakh for newer policies and the premium exceeds 10% of the sum assured or you fail to meet the exemption conditions, the tax applies only to the gains  and taxed under the head “Income from capital gains”. The entire maturity amount is not subject to tax.

3. Will the maturity amount be taxable?

The  ULIP maturity tax amount becomes taxable if the ULIP does not qualify for the Section 10(10D) exemption as per the Income Tax Act, 1961. In such cases, the investment gains are taxed as long-term capital gains under section 112A at 12.5% if the total taxable gains exceed ₹1.25 lakhs. If the policy meets the premium and eligibility criteria, the entire maturity amount remains completely tax-exempt.

4. Is ULIP maturity tax-exempt if the policyholder dies before maturity?

Yes, the death benefit from a ULIP is fully tax-exempt under Section 10(10D), regardless of premium amount or policy value. Even high-value ULIPs qualify for tax-free payouts in the event of the policyholder’s death, making the benefit entirely non-taxable for the nominee.

5. Can I avoid taxes on ULIP maturity if I invest in multiple policies?

Investing in multiple ULIPs does not automatically exempt you from tax. The premium cap of ₹2.5 lakh applies atthe aggregate level. However,  policies exceeding the limit will still be subject to capital gains tax on maturity. 

For example, if you hold three ULIP policies where the 1st policy premium is ₹1.5 lakh, the 2nd policy premium is ₹1 lakh, and the 3rd policy premium is ₹2 lakh, then the premiums of the first and second policies remain within the ₹2.5 lakh annual threshold and can qualify for exemption under Section 10(10D). However, the third policy, by exceeding the aggregate premium limit, will be treated as a non-exempt ULIP and its maturity proceeds will be taxable as capital gains.

Note: If assessee has opted for Old tax regime, assessee shall be eligible to claim deduction under chapter VI-A (like Section 80C, 80D, 80CCC, etc). If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) are available.