Taxation of ULIPs

How are ULIPs taxed in India?

A unit linked insurance plan (ULIP) is taxed at three points: when the premium is paid, while the fund runs, and when money comes out. Premiums can qualify for a deduction under the old tax regime. Proceeds on maturity, surrender or partial withdrawal are tax-free if the policy meets the conditions of section 10(10D). ULIPs that fail those conditions, mainly those with high premiums, are now treated as capital assets and taxed like equity mutual funds. Death proceeds remain exempt in all cases.

As of October 2026, these rules sit in the Income-tax Act, 2025 (in force from 1 April 2026), with the same substance as under the 1961 Act after the Finance Act, 2025.

ULIP taxation at each stage

The ₹2.5 lakh rule and the 2025 clarification

The Finance Act, 2021 removed the maturity exemption for ULIPs issued on or after 1 February 2021 if the annual premium, alone or with other such ULIPs, is above ₹2.5 lakh, and taxed the gains as capital gains under section 45(1B) of the 1961 Act. There was a grey area: ULIPs that failed only the 10% sum assured test were neither exempt nor clearly covered by section 45(1B).

The Finance Act, 2025 closed this from assessment year 2026-27. Any ULIP to which the 10(10D) exemption does not apply, for whatever reason, is a capital asset, its redemption gains are capital gains, and it is included in the definition of an equity-oriented fund for section 112A. In the 2025 Act the corresponding provisions are the definition of capital asset in section 2(22) and section 198 on long-term capital gains.

What that means in numbers. For a non-exempt ULIP that meets the equity-oriented fund test and is held for more than 12 months, long-term gains above ₹1.25 lakh a year (the combined exemption for listed equity and equity funds) are taxed at 12.5%, the rates set by the Finance (No. 2) Act, 2024. The treatment of shorter holdings and of debt-oriented ULIPs follows the general capital gains rules and is best checked case by case.

Example

A customer pays ₹3 lakh a year into a ULIP issued in 2022 for 10 years, a total of ₹30 lakh, and receives ₹48 lakh at maturity. Because the premium is above ₹2.5 lakh, the ₹18 lakh gain is a long-term capital gain. If the fund is equity-oriented and the customer has no other equity gains that year, ₹16.75 lakh is taxed at 12.5% after the ₹1.25 lakh exemption. Had the customer died during the term, the death benefit would have been tax-free.

What ULIP taxation means for distribution

• Under ₹2.5 lakh, the ULIP still has a tax edge. Gains in a qualifying ULIP are tax-free at maturity, while equity mutual fund gains above ₹1.25 lakh are taxed. This remains a fair point of comparison for long-term savers, provided the adviser also compares ULIP charges and the five-year lock-in.
• High-ticket ULIPs now compete with mutual funds on equal tax terms. Above ₹2.5 lakh, the ULIP is taxed much like an equity fund. The sale must rest on insurance cover, discipline and fund options, not on tax. Wealth and bancassurance teams selling large tickets should update their pitch.
• The aggregate test catches multi-policy customers. The ₹2.5 lakh limit applies across all ULIPs issued on or after 1 February 2021, including those with other insurers. Advisers should ask about existing ULIPs before calling a new one tax-free.
• GST exemption improves fund value. With no GST on charges from 22 September 2025, the net charges on individual ULIPs fell. This is worth showing in illustrations for new and existing customers. See GST on insurance.
• TDS on non-exempt payouts. Insurers deduct tax on the income part of non-exempt payouts. Customers should be told to expect a TDS entry and to report the gain correctly in their return. See TDS on insurance payouts.