ULIP Taxation

ULIP is a financial product that combines the benefits of market-linked investments and life insurance. So, a part of your premium is utilised to provide life insurance cover and the remaining is invested in various market-linked instruments. Here’s an overview of the ULIP taxation framework:

i. The premium you pay towards a ULIP is eligible for a tax deduction under Section 123 of Income Tax Act, 2025 (earlier Section 80C of the Income Tax Act, 1961) up to a maximum of ₹1.5 lakh annually.

ii. The maturity proceeds from ULIPs issued after Feb 1, 2021 is taxable only if the aggregate annual premium across all ULIPs exceeds ₹2.5 lakh. Otherwise the maturity proceeds are tax exempt.

iii. In case of the policyholder’s death, the amount received is fully tax exempt under section 10(10D).

iv. When there’s premature withdrawal before the completion of the lock-in period of 5 years, the proceeds will be taxable under the head “Income from Other Sources.” The 80C deduction shall also be reversed and taxable in the year of premature withdrawal.

The annual premium paid is tax exempt up to the maximum limit of ₹1.5 lakh under Section 123 of the Income Tax Act, 2025 (prevosuly Section 80C of the Income Tax Act, 1961). This is however only allowed if the policyholder opts for the old tax regime. Deduction under this section are not applicable in the new tax regime.

If you bought a ULIP after April 1, 2012, you can avail the deduction only when the premium amount is not more than 10% of the sum assured under the plan. In case the premium exceeds 10% of the total sum assured, you can avail the deduction on the amount equal to 10% of the sum assured.

If you bought a ULIP before April 1, 2012, you are eligible for deduction on the total premium paid up to the limit allowed under Section 123. However, this is possible only when the premium amount is less than 20% of the sum assured under the plan. If the premium amount is more than 20% of the claim amount, you can avail a deduction only on the amount equal to 20% of the sum assured.

Let us now consider the question - “Is ULIP maturity amount taxable?”. It’s important to understand these maturity tax rules is to plan investments in a tax efficient manner. Further, it also helps you avoid unexpected tax liabilities at the time of policy payout.

There are different situations under which the ULIP maturity is tax-free. Similarly, the ULIP maturity becomes taxable as per applicable the capital gains rules under certain circumstances. We have explained the different situations in detail below.

ULIPs are one of the several long-term investment plans. . If you buy a ULIP where the annual premium exceeds ₹2.5 lakh, the maturity proceeds will be taxable as capital gains. Some people buy multiple ULIPs to meet different financial goals. Let’s assume that the aggregate annual premium paid for the multiple ULIPs exceeds ₹2.5 lakh. In that case, the maturity proceeds are taxed. Let’s understand how the taxation would work with examples:

When you surrender a ULIP, there can be tax implications. However, the outcome depends on some important factors. These include the exit timing, date when the policy was issued, the premium you pay each year, and the level of life cover. These rules are specified u/s 11 of Income Tax Act, 2025, earlier Section 10(10D) of the Income Tax Act, 1961.

As per the tax provisions, ULIP surrender value is exempt from tax only if the policy fulfils all the conditions mentioned under Section 11. Let’s understand how the exit timing affects tax exemption.

Surrender Before 5 Years
When you surrender a ULIP policy before the five-year lock-in, the payout becomes taxable. In this case, the surrender value of the ULIP is added to your income. It is then taxed as per your income tax slab rate.

Any earlier deductions you claimed under Section 123 (Section 80C) will also be reversed and TDS can also be applied. If a policy is discontinued early, its fund value shifts to a Discontinued Policy Fund till the lock-in period ends. The surrender value is paid out only after the 5 year lock-in has ended

Surrender After 5 Years
You are free to surrender your ULIP after the end of the five-year lock in period. However, the payout must still meet some specific conditions to be tax exempt. It’s possible when the annual premium paid remains within 10% of the sum assured. Similarly, if the yearly premium remains within ₹2.5 Lakh for policies bought after Feb 1, 2021, the surrender value is tax-free in the hands of the policyholder.

In case, these conditions aren’t met, the surrender proceeds are added to your income. Then, they’re taxed as long term capital gains from equities. The LTCG rate in this scenario is 12.5% only on gains exceeding ₹1.25 lakh in a tax year.

Partial withdrawals are permitted only after the completion of the mandatory 5 year lock in period. The tax treatment of the amount depends on certain conditions. Let’s take a look at the conditions below:

i. When the withdrawal is up to the sum assured, the amount is exempt from all taxes. This means no tax is payable if the amount withdrawn remains within the sum assured.

ii. When the partial withdrawal is more than the sum assured, the excess amount is taxable. This amount is treated as income in the withdrawal year. It’s subject to taxation as per the applicable income slab rate of the policyholder. So, the applicable tax rate could be as high as 30% for those in the highest tax bracket.

ULIPs provide life insurance cover to the policyholder. This ensures that nominees receive the higher amount among the sum assured and the ULIP fund value at the time of policyholder’s demise. In some ULIPs, the future premiums are waived after the policyholder dies. The policy continues to generate returns on the investment till maturity.

The death benefit on ULIP is always tax-free in all cases. Even if the annual premium paid exceeds ₹2.5 lakh, the amount remains exempt from taxes. Besides, there is no TDS deduction in the case of a life cover payout.

ULIPs that have an aggregate annual premium exceeding ₹2.5 lakh (issued on or after Feb 1, 2021) are taxed like equity mutual funds. LTCG (held for more than 12 months) is taxed at 12.5% when gains exceed ₹1.25 lakh. On the other hand, STCG is applicable if units are held for less than 12 months before redemption. STCG is not applicable in the case of ULIPs.

In case of the old tax regime, you can claim a tax deduction of up to ₹1.5 lakh per year under Section 123 of Income Tax Act, 2025 for the premiums paid. This benefit is currently not available under the new tax regime. Maturity benefits from ULIPs are tax free as per Section 11 rules and this is applicable irrespective of the tax regime chosen.

Now let’s take a look at the taxation policies of two popular types of investments , ULIPs and mutual funds. In the table below, we have explained how taxation differs in both cases depending on various factors:

Section 194 DA under Income tax act 1961 states that the policies that are not exempted under section 10(10D) will be subject to TDS deduction at the time of pay-out. This rule is effective from Oct 1, 2014.The rate of TDS would be at 2% on any pay outs that exceeds ₹1 lakh per year. For policyholders who have not submitted their PAN Card copy, the TDS rate is 20% on the payout amount.

According to Section 10(10D) of Income tax act 1961, any ULIP policy bought after April 2012, would be tax exempt if the premiums paid in any year is less than 10% of sum assured. For policies bought before that, the tax exemption is applicable for those whose premium does not exceed 20% of the sum assured. So, to avoid higher TDS on ULIP, you should ensure that you have submitted a copy your valid PAN Card with the insurer.

In the case of tax exempt payouts from ULIPs, you need to mention the payout amount in the relevant section of your ITR. This is applicable if you have receive the life cover payout as a nominee or maturity benefit from a ULIP that complies with rules applicable under Section 11 of Income Tax Act, 2025. These details are to be provided in the EI (Exempt Income) Section of the ITR.

ULIP is a financial tool that provides you with the benefits of both investment and life insurance. That’s why it’s also seen as an effective option for retirement planning . When investing in ULIP, you should also check for ways to minimise your tax liability. We’ve listed a few tips for you below: