Understand about ULIP taxation
ULIP tax rules have evolved in recent years, especially after the changes introduced in the Union Budget 2025.
ULIP tax rules have evolved in recent years, especially after the changes introduced in the Union Budget 2025.
ULIP tax rules have evolved in recent years, especially after the changes introduced in the Union Budget 2025.
A ULIP plan, or Unit-linked Insurance Plan, combines life insurance and investment into one product. It offers policyholders the benefit of insurance coverage while also allowing them to invest in equity, debt, or hybrid funds. However, as with any investment product, it is important to understand the tax implications involved. ULIP tax rules have evolved in recent years, especially after the changes introduced in the Union Budget 2025. Let's explore how ULIPs are taxed and what it means for your returns.
How ULIP taxation works
Until January 31, 2021, all maturity proceeds from a ULIP plan were exempt from tax under Section 10(10D) of the Income Tax Act, regardless of the premium paid. But from February 1, 2021, the government revised these rules.
If the annual premium paid towards your ULIP plan exceeds ₹2.5 lakh in any financial year, the maturity proceeds will no longer be tax-free.
Furthermore, some changes were also introduced in the Union Budget 2025. As per the new rules, ULIPs whose premiums are above 10% of the policy value will be treated on par with other investment options and taxed as long-term capital gains (LTCG), if held for more than 12 months. Gains above ₹1 lakh from such ULIPs will be taxed at 10%.
Let’s break it down:
1. If your total ULIP premiums in any year are ₹2.5 lakh or less, the maturity amount remains tax-free under Section 10(10D).
2. If your premium exceeds ₹2.5 lakh, the maturity proceeds will be taxable.
3. This ULIP tax rule applies only to policies issued on or after February 1, 2021.
4 . If the ULIP proceeds are received on the demise of the policyholder, they remain exempt from tax, irrespective of the premium amount.
Examples of tax applicability on ULIPs
Suppose Mr. A pays ₹1 lakh per year for 10 years into a ULIP plan and receives ₹20 lakh at maturity. Since the annual premium is under ₹2.5 lakh, there is no tax on the maturity proceeds.
Now consider Mr. B, who pays ₹3 lakh per year. He receives ₹48 lakh on maturity. Since his annual premium exceeds the limit, the returns will be taxed as LTCG.
ULIP Tax deductions under section 80C
Despite the changes in maturity taxation, ULIPs still offer tax-saving benefits under Section 80C. You can claim a deduction of up to ₹1.5 lakh per year on the premiums paid. This makes ULIPs a smart choice for people looking to combine investment and tax planning. Just be mindful of the updated ULIP tax treatment at the time of maturity.
You can use a ULIP calculator to get premium estimates and ensure your premiums are well within the prescribed limits to enjoy the tax benefits.
Death benefit remains tax-free
Regardless of the premium amount, the sum received by the nominee upon the policyholder’s demise is fully tax-exempt under Section 10(10D). This ensures that a ULIP plan continues to serve its primary purpose, which is to provide financial protection to the family in case of the breadwinner’s demise.
A ULIP can be an effective way to ensure long-term wealth creation and life protection. However, with the changes in ULIP tax rules, it is important to plan wisely. Stay within the premium threshold if tax-free maturity is your goal or assess the net returns after tax if investing larger amounts. Use a ULIP calculator and consult a financial advisor to ensure your money serves you the right way.
Tax exemptions are as per applicable tax laws from time to time.