ULIP Taxation

Table of Content

1. ULIP Taxation Rules for FY 2022-23 and Recent Changes

2. Taxation of ULIP Maturity Proceeds

3. Tax on ULIP Surrender

4. ULIP Taxation and Equity Exposure

5. How to Optimize ULIP Investments for Tax Savings?

6. Latest ULIP Taxation Updates

7. Frequently Asked Questions on ULIP Taxation

ULIPs offer dual tax benefits that assist you in saving more while you make the investment, all thanks to the benefits available as per Section 80C and Section 10(10D) of the Income Tax Act, 1961.

Section 80C: Tax Savings on Premiums

When you make an investment in a ULIP, then the premiums you make payment of can assist you in reducing your taxable income. As per Section 80C of the Income Tax Act, 1961, you can claim deductions in respect of the premiums paid towards the ULIP policies up to overall ceiling limit of ₹1.5 lakh in a financial year. Further, this deduction is only available where the premium payable in any year does not exceed 10% of the actual capital sum assured for policies issued on or after 1 April 2012 (and 20% for policies issued prior thereto). This means a part of your ULIP contribution directly minimises your tax burden while you continue creating your wealth over the long term.

Section 10(10D): Tax-Free Maturity Benefits

ULIPs also offer the advantage of tax-free returns at maturity under Section 10(10D) of the Income Tax Act, 1961. As long as the policy meets the required conditions, the maturity payout received under a ULIP policy remains fully exempt from tax. One of the primary conditions is that your annual premium does not exceed 10% of the total sum assured for the policies on or after 1 April 2012 (and 20% in respect of policies issued prior thereto), as specified under the provisos to Section 10(10D) of the Income Tax Act, 1961.

However, pursuant to the amendments introduced by the Finance Act, 2021, the exemption under Section 10(10D) shall not be available in respect of ULIP policies issued on or after 1 February 2021 where the aggregate annual premium exceeds ₹2,50,000 for one or more ULIP policies and the annual premium would exceed 10% of the sum assured. In such cases, the proceeds received on maturity shall be taxable as Long Term Capital Gains at the rate of 12.5% for the gains exceeding ₹1.25 lakh in a financial year under the head “Income from capital gains”as per Section 112 of the Income Tax Act, 1961. This makes ULIPs an enticing option for the ones looking out to combine investment growth with tax efficiency.

Key Conditions to Remember

To make the most out of these tax benefits, the policy must abide by the rules regarding premium limits, lock-ins and sum assured requirements. If such conditions are not met, the maturity amount might become taxable.

Example:

Suppose you invest a sum of ₹1.5 lakh on an annual basis in a ULIP. As per Section 80C, you can claim the complete ₹1.5 lakh as a tax deduction. If you are in the 20% tax bracket, this saves you about ₹30,000 in taxes for the year. Later on, if your annual premium remains within the permitted limit, the maturity value, say ₹10 lakh, comes to you tax-free as per Section 10(10D).

ULIP Taxation Rules for FY 2022-23 and Recent Changes

Being aware of how ULIPs are taxed today is necessary, particularly with the current changes that have reshaped how premiums as well as maturity benefits are treated as per the latest tax rules.

New Taxation Rules

Recent tax changes to ULIP rules have created a clear distinction between policies with higher premiums and regular ULIPs under the Income Tax Act, 1961. Earlier, most ULIPs enjoyed tax-free maturity benefits under Section 10(10D), however, under the amended provisions, gains arising from ULIP policies issued on or after 1 February 2021, where the aggregate annual premium exceeds ₹2,50,000 and the annual aggregate premium exceeds 10% of the sum assured, are no longer eligible for exemption under the said section.

Such gains are looked upon as equity investments, which means they are classified as long-term or short-term capital gains based on how long you remain invested and are taxed under the head “Income from Capital Gains” as per the Income Tax Act, 1961.

Impact of Budget 2022–23

The Union budget, through the amendments carried forward reinforced these changes by tightening the tax framework for high-premium ULIPs available under the Income Tax Act, 1961. While the goal was to curb the misuse of ULIPs as pure investment vehicles, it also brought transparency for investors.

For ULIPs with a premium of not exceeding ₹2.5 lakh, the classic tax advantages remain intact—namely, deduction of premiums under Section 80C (within the overall limit of ₹1,50,000) and exemption of maturity proceeds under Section 10(10D), subject to fulfilment of the prescribed conditions.. However, for ULIP policies issued on or after 1 February 2021 where the premium exceeds the said threshold, the maturity proceeds are taxable as capital gains by treating such ULIPs at par with equity-oriented mutual funds. Accordingly, short-term capital gains are taxable at 20% under Section 111A, whereas long-term capital gains exceeding ₹1,25,000 in a financial year are taxable at 12.5% under Section 112A as per the Income Tax Act, 1961.

Real-World Examples

Example 1:

If someone pays an annual premium of ₹1.2 lakh for a ULIP and receives ₹15 lakh at maturity, the payout stays completely tax-free because the premium is well within the permitted threshold.

Example 2:

For another policyholder paying ₹3 lakh on an annual basis, with a maturity amount of ₹48 lakh, the gains are taxable. Since the premium exceeds the ₹2.5 lakh cap, the profit portion is treated as capital gains and taxed accordingly.

ULIP Taxation Rules for FY 2022–23 and Recent Changes

Taxation of ULIP Maturity Proceeds

Exemption Under Section 10(10D)

When a ULIP reaches maturity, the amount you receive can be completely tax-free under Section 10(10D) of the Income Tax Act, 1961. This exemption applies as long as the annual premium you make payment of does not surpass 10% of the sum assured and where the aggregate annual premium exceeds ₹2,50,000 for one or more policies. If your policy follows this rule across the term, the whole payout, including the investment gain, comes to you without any tax deductions.

When Maturity Proceeds Become Taxable

Maturity benefits may become taxable if the policy crosses certain limits. The most common situation is when the annual premium goes above the permitted threshold as prescribed under the Income Tax Act, 1961. In such cases, the gains are taxed just like equity investments.

Another situation is early surrender. In case you exit the ULIP before the completion of the mandatory lock-in, the proceeds might be added to your income and taxed depending on your income slab.

Example:

• Tax-Free Case:

Suppose you pay ₹80,000 annually and the sum assured is ₹10 lakh. As the premium is within the 10% rule, a maturity amount equalling ₹12 lakh will be completely tax-free.

• Taxable Case:

Now imagine a ULIP where the annual premium is ₹3 lakh and the maturity value is ₹40 lakh. As the premium surpasses the permitted limit, the gain portion, say ₹25 lakh, will attract capital gains tax.

Recent Taxation Changes

Current updates have made it clear that high-premium ULIPs will not any longer enjoy blanket tax exemptions. Policies having annual premiums of over ₹2.5 lakh now fall under capital gains taxation and will be taxed under the Section 111A and 112A of the Income Tax Act, 1961. This brings them closer to market-associated investment taxation. 

Such changes ensure that only qualifiable policies continue to get tax-free maturity benefits, while the high-value ULIPs follow a well-structured tax treatment.

Tax on ULIP Surrender

Taxability of Surrender Proceeds

When you surrender a ULIP after completing the mandatory five-year lock-in, the amount you receive is treated differently depending on whether your policy meets the tax-exemption rules and regulations. For the Policies issued after 1 February 2021, if your annual premium has always remained within 10% of the sum assured and the annual aggregate premium would not exceed ₹2.5 lakh in a financial year, the surrender value usually remains tax-free.

However, if the premium exceeds this threshold, the gains from the policy are taxed as Long Term capital gains at the rate of 12.5% for the gains exceeding threshold limit of ₹1.25 lakh, like other market-linked investments as per the Income Tax Act, 1961.

Taxation for Shorter Policies

If you surrender the ULIP before finishing the 5-year lock-in period, the tax treatment changes completely. Not only does the surrender value become taxable, but the deductions you claimed under Section 80C in previous years are reversed.

This means the premiums that were earlier used to minimise your taxable income will now be added and taxed as per your slab.

Example:

Imagine you have been paying ₹60,000 per year towards a ULIP with a sum assured equalling ₹8 lakh. Post 6 years, you decide to surrender the policy and get ₹5 lakh. As your premium remained within the rule of 10% and the lock-in is over, the surrender value stays free of tax.

Now, consider another case in which you surrender the policy in the third year.

Suppose you get a sum equalling ₹2 lakh. This amount is taxable according to your tax slab. The ₹1.2 lakh you previously claimed as per Section 80C over two years is added to your taxable income.

ULIP Taxation and Equity Exposure

Knowing how equity exposure has an influence on ULIP taxation assists you in better understanding how market movements impact your returns and tax outcome in totality.

Equity-Oriented ULIPs

ULIPs that invest a bigger share of their funds in equities work like market-associated products. Their tax treatment follows a pattern similar to this. When the annual premium of such ULIPs exceeds the specified limit, the gains from such plans are taxed as equity capital gains.

This means the returns you earn depend not only on market movements but also on how the tax rules apply to equity-focused plans.

Impact of Equity Exposure

Higher equity exposure can offer an opportunity for better growth over the long term. But it also influences how your returns are taxed. Since equity markets fluctuate, the final value of your ULIP at maturity or surrender reflects both market performance and the applicable tax rules.

If the policy stays within the premium threshold, the maturity amount remains tax-free. But once it crosses the limit, the gains, especially those driven by equity, are subject to capital gains tax as prescribed under the Income Tax Act, 1961.

Long-Term vs Short-Term Capital Gains

For ULIPs that fall under taxable rules, the holding period becomes essential. If the policy is held for over a span of 12 months, the gains are looked upon as long-term and taxed at a lower rate. In case the holding period is shorter, then the gains count as short-term. They are taxed at a higher rate.

This makes it necessary to plan out your ULIP time frame prudently, particularly when your plan has substantial exposure to equity.

How to Optimize ULIP Investments for Tax Savings?

Thoughtful planning can help you use your ULIP not just for wealth creation but also to maximise the tax benefits it offers.

Maximise Section 80C Benefits

To make the most of your ULIP’s tax advantages, start by planning your premium payments so you can fully use the ₹1.5 lakh deduction available under Section 80C of the Income Tax Act, 1961.

Lining up your yearly contributions with this limit ensures you reduce your taxable income while creating savings over the long-term period.

Choose Policies with Tax-Efficient Equity Exposure

When striking a comparative analysis among ULIPs, look closely at how every plan allocates funds across equity, debt and hybrid funds. Policies that balance out equity exposure in a responsible manner can assist you in enjoying better returns without levying any unnecessary tax.

Make sure the premium remains within the prescribed limits so that your maturity amount stays eligible for any tax exemptions.

Stay Invested for the Long Term

ULIPs reward great patience. Holding your policy for the complete term not just supports wealth creation but also assists you in qualifying for tax-free maturity benefits as per Section 10(10D), provided the premium-to-sum-assured ratio remains within the allowed range.

Exiting early can result in taxable proceeds and reversal of previous tax deductions, so long-term commitment pays off.

Use Fund Switching Wisely

One of the significant benefits of ULIPs is the freedom to shift between equity, debt and hybrid funds without any tax impact. You can make adjustments to your investment mix based on the scenario of the market or life goals. For instance, you might switch to debt funds when markets appear volatile. You may even shift to equities when looking for higher growth.

Such internal switches do not attract taxes. This permits you to manage risk as well as returns in a practical way while keeping your tax liability under check.

Latest ULIP Taxation Updates

Current tax updates have changed how ULIPs are treated. This is particularly true for policies with higher premiums. The Finance Act, 2021, first introduced the rule that ULIPs issued on or after 1st February 2021 will lose their tax-free maturity benefit if the annual premium surpasses ₹2.5 lakh and the premium exceeds 10% of the sum assured.

This meant that just policies within this limit could enjoy complete exemption as per Section 10(10D) of the Income Tax Act, 1961. Any policy exceeding it would have its returns taxed as capital gains, the same as equity-oriented mutual funds.

The changes were further clarified in Budget 2025, which reinforced that ULIPs with an annual premium exceeding ₹2.5 lakh or 10% of the sum assured will not qualify as tax-exempt plans. In place, the gains from such non-qualifying ULIPs will follow the capital gains structure:

• STCG if held for 12 months or less will be taxed at the rate of 20%

• LTCG if held for over 12 months will be taxed at the rate of 12.5% over the gains exceeding ₹1.25 lakh

This brings ULIP taxation closer to the manner in which market-associated products are taxed, which ensures consistency throughout investment-oriented life insurance policies.

A simple timeline assists you in making this extremely clear:

• Before 1st February 2021 → All ULIPs (meeting the rule of 10% premium to sum assured) enjoyed tax-free maturity.

• On or after 1st February 2021 → ULIPs with premiums of over ₹2.5 lakh are taxable.

Examples:

• If you make an investment of an amount equalling ₹1.5 lakh per year, you can avail deduction under Section 80C.

• If you make a payment equal to ₹3 lakh per year, then the plan surpasses the threshold, and the maturity gains become taxable as capital gains.

One point stays totally unchanged: the death benefit is tax-free, irrespective of the size of the premium or policy conditions. This ensures that ULIPs continue to offer strong protection along with their investment features.

Frequently Asked Questions on ULIP Taxation

1. Are ULIP premiums tax-deductible?

Yes. Premiums paid toward a ULIP are eligible for tax deductions under Section 80C, up to ₹1.5 lakh in a financial year, as long as the policy meets the required conditions.

2. Is income from ULIP taxable at the time of maturity or surrender?

It is based on whether the policy qualifies for tax exemption. In case the premium stays within the prescribed limits, then the maturity/surrender value is tax-free. If it surpasses the limits or the policy is surrendered early, then the proceeds shall become taxable under the head “Income from Capital Gains”.

3. Is the maturity amount from ULIPs taxable?

Maturity payouts are entirely tax-free under Section 10(10D) ¹ of the Income Tax Act, 1961 if the ULIP premium does not exceed 10% of the sum assured and remains within the ₹2.5 lakh premium limit. If such conditions are not abided by, then the gains are taxed as capital gains.

4. How Is Tax Calculated if You Have More Than One ULIP?

When you own multiple ULIPs that are issued on or post 1st February 2021, the total annual premium across all such policies is added together. If the clubbed premium crosses the mark of ₹2.5 lakh in a year, only the ULIPs within the limit remain tax-exempt. Those surpassing the limit become taxable, and their gains are looked upon as capital gains.

5. Is ULIP taxable above 2.5 lakhs?

Yes. In case the annual premium for ULIPs issued on or after 1st February 2021 surpasses ₹2.5 lakh, then the maturity amount is no longer tax-free. The gains are taxed as either short-term or long-term capital gains.

6. Is ULIP surrender after 5 years taxable?

If the premium remains within the permitted limits, surrendering a ULIP post the five-year lock-in usually keeps the proceeds tax-free. However, if the premium surpasses the threshold or the policy does not meet eligibility rules and regulations, the surrender value shall become taxable.