ULIP taxation in India works at three points: the premium you pay, the fund value while the policy runs, and the payout at maturity, surrender, or death. Premiums qualify for a deduction of up to ₹1.5 lakh a year under Section 80C of the Income Tax Act, 1961, but only if you file under the old regime. The fund grows without annual tax. Maturity proceeds are fully exempt under Section 10(10D) if the annual premium stays within 10% of the sum assured and, for policies issued on or after February 1, 2021, the aggregate annual premium across all your ULIPs stays at or below ₹2.5 lakh. Break either condition and the gain becomes taxable, now under the same rules as equity mutual funds following Budget 2025 changes taking effect April 1, 2026.
Premium Deduction Under Section 80C
Each year’s ULIP premium reduces your taxable income under Section 80C, subject to the combined ₹1.5 lakh cap that also covers EPF, PPF, ELSS, children’s tuition fees, and other eligible instruments.1Income Tax Department of India. FAQs on Interplay and Transition – Income-tax Act, 2025 If your other 80C investments already fill the cap, the ULIP premium adds nothing on this line.
A ratio condition sits alongside the cap. For policies issued on or after April 1, 2012, the annual premium cannot exceed 10% of the sum assured. Older policies use a 20% threshold. Cross the applicable limit in any year and the entire deduction for that premium is disallowed. The rule pushes the product to function as insurance first.
Only Under the Old Regime
The Section 80C deduction is available only if you file under the old income tax regime. The new regime under Section 115BAC, which has been the default since FY 2023-24, does not permit Section 80C deductions at all. If you are on the new regime and expecting your ULIP premium to cut your tax bill, it will not. You would need to actively opt for the old regime, and that trade-off only pays off if the total value of your old-regime deductions beats the new regime’s lower slab rates.
How the Fund Value Is Taxed While the Policy Runs
The investment portion grows without annual taxation. Unrealised gains are not reported year to year, and NAV appreciation compounds without being clipped by capital gains tax along the way. Compared with holding mutual funds directly, where every redemption or switch is a taxable event, that deferral is a real structural difference.
Fund Switches
ULIPs let you shift your corpus between equity, debt, and balanced options within the same policy. Switches inside a ULIP are tax-neutral. You can rebalance without triggering a tax liability, and most insurers allow a set number of free switches each year.
Partial Withdrawals After the Lock-In
Partial withdrawals from the fund value are permitted once the five-year lock-in ends. These are generally not taxed as long as the policy stays active and the Section 10(10D) conditions for the final maturity exemption remain intact. Watch that a large withdrawal doesn’t pull the remaining sum assured below the threshold needed to preserve exempt status at maturity.
Maturity Proceeds Under Section 10(10D)
Whether the maturity payout is tax-free comes down to Section 10(10D). For policies issued on or after April 1, 2012, the annual premium must not have exceeded 10% of the sum assured in any policy year. For policies issued between April 1, 2003, and March 31, 2012, the threshold is 20%. If the policy meets this condition and also passes the high-premium test below, the entire maturity payout including any bonuses is tax-free. No capital gains tax, no income tax, no TDS.
If the policy fails a condition, the gain becomes taxable. Gain is the maturity payout minus the total premiums paid. How that gain is taxed depends on when the policy was issued and whether the high-premium rules apply.
High-Premium ULIPs After February 1, 2021
The Finance Act, 2021, created a separate track for ULIPs with large premium outlays. For any ULIP issued on or after February 1, 2021, the Section 10(10D) exemption is denied if the aggregate annual premium across all your ULIPs exceeds ₹2.5 lakh in any year of the policy term. Once that happens, the policy is treated as a capital asset and the maturity or surrender proceeds are taxed under the capital gains framework rather than exempted.
Budget 2025 Changes Effective April 1, 2026
Budget 2025 clarified how these non-exempt ULIPs are taxed. From April 1, 2026, high-premium ULIPs are explicitly classified as equity-oriented funds under Section 112A. Gains follow equity mutual fund rules:
- Short-term capital gains, where the policy is held for 12 months or less, are taxed at 20% under Section 111A.2Income Tax Department of India. Sale of Shares – Taxation and Capital Gains
- Long-term capital gains, where the policy is held for more than 12 months, are taxed at 12.5% under Section 112A on gains above ₹1.25 lakh in a financial year.
The gain is calculated as maturity or surrender proceeds minus total premiums paid. The holding period threshold is 12 months, not the 36 months once used for debt-oriented instruments. The flat 12.5% LTCG rate is generally more favourable than the slab-rate treatment that would otherwise apply to non-exempt insurance proceeds.
The Aggregate Rule Across Multiple Policies
The ₹2.5 lakh threshold is an aggregate figure across all ULIPs held by the individual. Three policies at ₹1 lakh each together breach the limit at ₹3 lakh. In that case, you can designate one policy as the tax-exempt one, and the remaining policies have their proceeds taxed as capital gains. Usually the policy with the highest expected maturity value is the one to designate, since that shelters the largest gain.
TDS on Non-Exempt Payouts
When maturity or surrender proceeds are not exempt under Section 10(10D), the insurer deducts TDS under Section 194DA before paying you. The rate is 2% on the net gain, applicable when the total payout in a financial year exceeds ₹1 lakh. If you have not provided your PAN to the insurer, the rate rises to 20%.
TDS is an advance collection, not a separate tax. You claim credit for it when filing your return and settle the difference against your actual liability. Getting the PAN sorted well before maturity avoids the higher withholding rate.
Surrendering Before Five Years
ULIPs carry a mandatory five-year lock-in. Surrendering inside that window creates two tax problems. Any Section 80C deductions you claimed on premiums in earlier years may be reversed and added back to your taxable income in the year of surrender, taxable at your applicable slab rate. And the fund value of a discontinued ULIP is moved to a Discontinued Policy Fund and only paid out after the lock-in ends, so the money doesn’t reach you immediately either.
Surrendering after the lock-in follows the same rules as maturity. If the policy meets Section 10(10D), the surrender value is tax-free. If it does not, because the premium exceeded 10% of the sum assured or because the aggregate crosses ₹2.5 lakh for a post-February 2021 policy, the gain is taxable. For high-premium ULIPs, it is taxed as capital gains at the equity rates: 20% STCG or 12.5% LTCG depending on holding period.
Death Benefit
The death benefit paid to the nominee is fully exempt from income tax under Section 10(10D), regardless of the premium amount, the premium-to-sum-assured ratio, or whether the policy would have qualified for the maturity exemption. Even a high-premium ULIP that would be taxable at maturity passes its death benefit to the nominee tax-free.
GST on ULIP Premiums
ULIP premiums used to attract 18% GST. From September 22, 2025, the government removed GST on individual life insurance premiums, ULIPs included. On a ₹2 lakh annual premium, that is ₹36,000 a year no longer added to the cost, for new and existing individual policies.