Taxation of ULIP in India

Understanding the tax on ULIP is important before investing in a Unit Linked Insurance Plan. A ULIP combines life insurance with market-linked investment. Part of the premium offers insurance cover, while the rest is invested in equity or debt markets. Over time, taxation rules for ULIPs have changed to ensure fair treatment across investment options.

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How ULIP Taxation Works

Earlier, ULIP maturity proceeds were fully tax-free. This changed from 1 February 2021. Under the new rules, taxation depends on the annual premium paid. If the yearly premium does not exceed ₹2.5 lakh, the maturity amount remains exempt under Section 10(10D) of the Income-tax Act. This rule applies even if the policy earns high returns.

However, if the annual premium crosses ₹2.5 lakh in any policy year, the tax benefit is withdrawn. In such cases, the gains become taxable. This change ensures that ULIPs are not used only as tax-free investment tools.

Tax on ULIP Maturity Proceeds

When a ULIP becomes taxable, the maturity amount is treated like an equity investment. The gains are taxed as long-term capital gains (LTCG) if the holding period is more than 12 months. A tax rate of 10% applies on gains above ₹1 lakh. This aligns the tax on ULIP with equity-oriented mutual funds.

If a person owns multiple ULIPs, the premiums are added together. If the combined annual premium exceeds ₹2.5 lakh, only eligible policies remain tax-free. Importantly, any payout received on the death of the policyholder is fully exempt, regardless of premium value.

Why the Rules Were Changed

The government introduced these rules to prevent misuse. High-value ULIPs were earlier used to earn tax-free market returns. The revised tax on ULIP ensures fairness while still supporting genuine insurance needs.

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Conclusion

ULIPs continue to offer tax efficiency for moderate premiums. Knowing the tax on ULIP helps investors plan better and avoid surprises at maturity.