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Tax on ULIP: Understand the latest ULIP taxation rules, including key amendments from the Finance Act, 2021 under Sections 80C and 10(10D). Plan your investments for optimal tax benefits
The Union Budget 2025 has introduced key changes to the taxation of ULIP plans, impacting investors and policyholders. Below is a breakdown of the latest updates regarding taxation on ULIP and how they compare to the previous tax regime.
In 2021, the budget amended Section 10(10D) of the Income Tax Act, altering the tax treatment of ULIP maturity proceeds. These changes came into effect on February 1, 2021, impacting policies issued on or after this date.
As per the amendment, the maturity amount (including bonuses) will no longer be tax-exempt if:
In such cases, the maturity proceeds will be subject to taxation as per applicable income tax deductions list.
Furthermore, one of the benefits of ULIP that policies issued before February 1, 2021, continue to enjoy full ULIP tax exemption on maturity, regardless of the premium amount. This amendment aimed to curb the use of ULIPs as a tax-free investment avenue for high-value premiums, aligning them closer to mutual fund taxation norms.
Maturity taxation in a unit linked insurance plan (ULIP) refers to the application of income tax laws to the proceeds received by the policyholder when the policy reaches its pre-defined end date (maturity) during the policyholder’s lifetime.
Specifically, taxability of ULIP on maturity addresses if the fund value paid out by the insurer upon policy maturity is:
The tax on ULIP maturity proceeds is determined by several key factors established by the Income Tax Act, 1961:
Understanding maturity taxation is essential for assessing the post-tax returns of a ULIP. It is important to differentiate maturity proceeds from death benefits, as death benefits received under a ULIP are generally tax-exempt, irrespective of the premium amount.
Understanding how ULIP plan taxation rules apply in practice can be best achieved through illustrative examples. If you are wondering is ULIP tax free, below are scenarios showcasing the tax treatment of ULIP proceeds based on policy issuance dates and premium amounts.
Scenario: Mr. Sharma purchased a ULIP in March 2011.
Tax Analysis For ULIPs issued before April 1, 2012, the primary condition for tax exemption on maturity proceeds under Section 10(10D) is that the annual premium should not exceed 20% of the sum assured.
Conclusion
The maturity proceeds of ₹30,00,000 received by Mr. Sharma will be entirely tax-exempt under Section 10(10D). The Budget 2021 changes (₹2.5 lakh premium limit) do not apply to policies issued before February 1, 2021.
Scenario: Ms. Gupta purchased a ULIP in June 2015.
Tax Analysis For ULIPs issued on or after April 1, 2012, but before February 1, 2021, the annual premium must not exceed 10% of the sum assured for maturity proceeds to be tax-exempt under Section 10(10D).
Conclusion
The maturity proceeds of ₹20,00,000 received by Ms. Gupta will be entirely tax-exempt under Section 10(10D). The Budget 2021 changes regarding the ₹2.5 lakh premium threshold are not applicable here.
Let us consider two scenarios here:
Scenario A: Premium within limits
Tax Analysis (Scenario A):
Conclusion (Scenario A): The maturity proceeds of ₹35,00,000 will be tax-exempt under Section 10(10D).
Scenario B: Premium exceeds ₹2.5 lakh
Tax Analysis (Scenario B):
Conclusion (Scenario B): The maturity proceeds are taxable as per laws in income tax laws.
Scenario: Mr. Kumar purchased a ULIP in April 2021.
Tax Analysis Since the annual premium exceeds ₹2.5 lakh, Section 10(10D) exemption is not available for any sum received under this policy (except death benefit). Therefore, partial withdrawals will also be assessed for tax on the gains portion.
The tax treatment of partial withdrawals from ULIPs, which is permissible after the 5-year lock-in, directly depends on the overall taxability of the policy’s maturity proceeds under Section 10(10D). If your ULIP qualifies for tax-exempt maturity, i.e., it adheres to premium-to-sum-assured ratios and, for policies issued post-Jan 2021, has an annual premium of ₹2.5 lakh or less), then partial withdrawals are also generally tax-free.
Conversely, for high-premium ULIPs issued post-January 2021 where the annual premium exceeds ₹2.5 lakh, making the maturity proceeds taxable, any partial withdrawal will also be taxable. In this scenario, the gains portion of the withdrawal amount is subject to capital gains tax .
1
Yes, premiums paid for ULIPs qualify for deduction under Section 80C of the Income Tax Act, up to the overall limit of ₹1.5 lakh. For policies issued after April 1, 2012, this benefit is restricted to annual premiums up to 10% of the actual sum assured.
2
It depends. Generally, yes, under Section 10(10D), if the annual premium is within 10% of the sum assured (20% for policies before April 2012). However, for ULIPs issued on or after February 1, 2021, if the aggregate annual premium exceeds ₹2.5 lakh, the ULIP maturity taxability becomes liable as capital gains.
3
If surrendered before the 5-year lock-in:
4
If the ULIP’s maturity proceeds are tax-exempt, partial withdrawals after the 5-year lock-in are generally tax-free. For high-premium ULIPs, where maturity is taxable, partial withdrawals are also taxable on the gains component
5
As per Budget 2025 proposals, ULIP investors with annual premiums below ₹2.5 lakh will now be subject to a 12.5% capital gains tax on withdrawals made after one year. This tax applies under Section 112A, regardless of the fund’s equity or debt allocation.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
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Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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