This guide explains ULIP taxation in India in simple words. A ULIP, or Unit Linked Insurance Plan, mixes life cover with market-linked investment. Part of your premium buys life insurance. The rest goes into funds you pick, such as equity, debt, or a mix of both. The tax treatment is where most buyers get confused. A ULIP can be fully tax-free at maturity, or its gains can be taxed like a mutual fund. The difference comes down to two numbers: the premium-to-cover ratio and the ₹2.5 lakh annual premium limit.
Quick answer: ULIP maturity money is tax-free under Section 10(10D) only if your annual premium stays within 10% of the sum assured and, for ULIPs bought on or after 1 February 2021, your total ULIP premium across all policies stays at or below ₹2.5 lakh a year. Cross either limit and the gain is taxed as a capital gain instead. The death benefit stays tax-free in all cases.
What is a ULIP, in plain words?
A ULIP is a life insurance policy with an investment account built in. You pay a premium each year. The insurer deducts charges for the cover and fund management, and invests the rest in funds of your choice. After a 5-year lock-in, you can switch funds or make partial withdrawals. At maturity, you get the fund value. If you die during the term, your nominee gets the death benefit, which is usually the higher of the sum assured and the fund value.
The tax rules treat the premium, the maturity payout, and the death benefit as three separate events. Each has its own rule.
ULIP tax at a glance
| Stage | Tax rule |
|---|---|
| Premium paid | Deduction under Section 80C, up to ₹1.5 lakh a year combined with all other 80C items, old regime only |
| Maturity payout | Tax-free under Section 10(10D) if both limits are met; taxed as capital gains if not |
| Death benefit | Fully tax-free under Section 10(10D), no matter the premium |
| Surrender after 5-year lock-in | Same test as maturity: tax-free if Section 10(10D) conditions are met |
| Surrender before 5 years | Money goes to a discontinuance fund and is paid after the lock-in ends; tax follows the same Section 10(10D) test |
Is ULIP maturity amount taxable?
It depends on the policy, not on ULIPs in general. The maturity amount is tax-free if the policy passes the Section 10(10D) test. For policies issued on or after 1 April 2012, the annual premium must not exceed 10% of the sum assured in any year. For policies issued before that date, the limit is 20% of the sum assured.
For ULIPs issued on or after 1 February 2021, there is a second test. Your total annual premium across all such ULIPs must not exceed ₹2.5 lakh. Fail either test and the maturity payout loses its exemption. Only the gain is taxed, not the full payout. The premiums you paid are not taxed again.
A note on section numbers: this guide uses the section numbers most readers and insurers still cite from the Income-tax Act, 1961. The Income-tax Act, 2025, which applies from 1 April 2026, renumbers many provisions, so your policy document may show a new number for the same rule.
What is the ₹2.5 lakh rule for ULIP?
The Finance Act, 2021 added a special rule for ULIPs. For any ULIP issued on or after 1 February 2021, the Section 10(10D) exemption does not apply if the annual premium payable exceeds ₹2.5 lakh in any year of the policy term.
Three points catch people out:
- It is an aggregate limit. The ₹2.5 lakh counts across all ULIPs issued to you on or after 1 February 2021, added together. Two policies at ₹1.5 lakh each mean ₹3 lakh in total, so both lose the exemption.
- One bad year is enough. If you cross ₹2.5 lakh in even a single year, the exemption is lost for that policy’s maturity payout. Paying less in later years does not bring it back.
- It sits next to the 10% test, not instead of it. A policy must pass both tests. A ₹2 lakh premium can still fail if it exceeds 10% of a small sum assured.
The ₹2.5 lakh rule is lower than the ₹5 lakh aggregate cap that applies to traditional, non-ULIP policies bought on or after 1 April 2023. ULIPs got the stricter limit because high-premium ULIPs were being used mainly as investment products.
What changed in Budget 2025 for ULIP taxation in India?
Before Budget 2025, the law was unclear about how to tax a ULIP that had lost its Section 10(10D) exemption. Some argued the gain was “income from other sources” and taxed at slab rates. Budget 2025 settled this: a non-exempt ULIP is treated as a capital asset, and its gains are taxed as capital gains.
For an equity-oriented ULIP held for more than one year, the gain is taxed as a long-term capital gain at 12.5% on gains above ₹1.25 lakh in a financial year, the same treatment as equity mutual funds. If held for one year or less, the gain is taxed as a short-term capital gain at 20%. For a debt-oriented ULIP, the gain is taxed as a capital gain at the rate that applies to that fund type, so check your fund’s equity share in the policy statement before you assume the equity rate.
These Budget 2025 rules apply from 1 April 2026. If your policy matures before that date, ask your insurer or a tax professional which treatment applies to your payout.
How does the 80C deduction work for ULIP premium?
ULIP premiums qualify for deduction under Section 80C, up to ₹1.5 lakh a year. That ₹1.5 lakh is a combined cap across all 80C items: EPF, PPF, ELSS, life insurance premiums, and others share the same limit. Paying ₹2 lakh in ULIP premiums does not give you a ₹2 lakh deduction. You get ₹1.5 lakh at most, and only if you have room left under the cap.
The deduction is available only under the old tax regime. Under the new regime, which is now the default, Section 80C does not apply. So a buyer in the new regime gets no tax saving on the premium, even though the maturity payout can still be tax-free if the Section 10(10D) tests are met. Check your regime before you buy a ULIP mainly for tax saving.
What is TDS on ULIP maturity?
When a payout is not exempt under Section 10(10D), the insurer must deduct tax at source under Section 194DA before paying you. The rate is 2% of the income part of the payout, that is, the payout minus the premiums you paid. It applies when the total payout in a financial year exceeds ₹1 lakh.
TDS is not the final tax. It is an advance payment. When you file your return, you report the full capital gain, work out the tax at the correct rate, and adjust the 2% already deducted. If too much was deducted, you claim a refund. If too little, you pay the balance. TDS applies only to resident policyholders.
What happens if I surrender my ULIP before 5 years?
ULIPs have a 5-year lock-in. You cannot walk away with your money in the first five years. If you stop paying or surrender early, the insurer moves the fund value to a discontinuance fund after deducting discontinuance charges. That money is paid to you only after the 5-year lock-in period ends.
The tax treatment follows the same Section 10(10D) test as maturity. If the policy met the tests, the payout is tax-free. If not, the gain is taxed as a capital gain. Also, any 80C deduction you claimed on the premiums can be affected if the policy ends early, so check with your insurer before you surrender. In most cases, staying invested past the lock-in is better than surrendering early, because you avoid charges and keep the tax benefits.
Partial withdrawals are allowed after the 5-year lock-in. They follow the same rule: tax-free if the policy passes the Section 10(10D) tests, taxed as capital gains if it does not.
Are ULIPs bought before February 2021 still tax-free?
Yes, if they pass the older test. The ₹2.5 lakh rule does not apply to ULIPs issued before 1 February 2021 at all. Those policies are tested only on the premium-to-sum-assured ratio: 10% for policies from 1 April 2012, 20% for older ones. There is no premium ceiling. A pre-2021 ULIP with a ₹10 lakh annual premium can still pay a fully tax-free maturity amount, as long as the premium stayed within 10% of the sum assured each year.
ULIP vs ELSS vs mutual fund: tax comparison
| Feature | ULIP | ELSS fund | Regular equity mutual fund |
|---|---|---|---|
| Premium or investment deduction | 80C, up to ₹1.5 lakh, old regime only | 80C, up to ₹1.5 lakh, old regime only | No deduction |
| Lock-in | 5 years | 3 years | None |
| Maturity or redemption tax | Tax-free if Section 10(10D) tests pass; else capital gains | Long-term gains above ₹1.25 lakh at 12.5% | Long-term gains above ₹1.25 lakh at 12.5% |
| Death benefit | Tax-free | No insurance cover | No insurance cover |
| Charges | Premium allocation, fund management, mortality charges | Fund management only | Fund management only |
A ULIP gives you insurance plus investment in one product, but the charges are higher than a plain mutual fund. If you already have term insurance, a mutual fund plus term plan often costs less for the same cover and investment. Buy a ULIP for the combined product, not only for tax saving.
Three worked examples
Example 1: Small premium, fully tax-free. Ritu buys a ULIP in 2022 with a ₹1 lakh annual premium and a ₹12 lakh sum assured. Her premium is 8.3% of the sum assured, under the 10% test, and under ₹2.5 lakh. At maturity she gets ₹18 lakh. The full amount is tax-free. She also claims ₹1 lakh under 80C each year in the old regime.
Example 2: Two policies, aggregation trap. Amit buys two ULIPs in 2023, each with a ₹1.5 lakh premium. Each policy alone looks safe. Added together, his annual ULIP premium is ₹3 lakh, above ₹2.5 lakh. Both policies lose the Section 10(10D) exemption. At maturity, the gains on both are taxed as capital gains, even though neither policy crossed the limit on its own.
Example 3: High-premium equity ULIP, gain taxed. Sana buys a ULIP in 2022 with a ₹4 lakh annual premium and invests in an equity fund. She pays ₹20 lakh in premiums over five years and gets ₹28 lakh at maturity. The gain is ₹8 lakh. As a long-term capital gain, the first ₹1.25 lakh is exempt and the remaining ₹6.75 lakh is taxed at 12.5%, which is ₹84,375. The insurer deducts 2% TDS on the ₹8 lakh gain, which is ₹16,000, and she adjusts the balance when she files her return.
Common mistakes to avoid
- Buying a second ULIP without adding up premiums. The ₹2.5 lakh limit is aggregate. A second small policy can push you over.
- Assuming the whole maturity amount is taxed. Only the gain is taxed. Your premiums come back without tax.
- Claiming 80C in the new regime. The deduction works only in the old regime. New-regime buyers get no premium deduction.
- Surrendering in year three. You lose money to charges, wait till the lock-in ends for payment, and may lose tax benefits.
- Ignoring TDS. The 2% deducted under Section 194DA is not the final tax. Report the gain in your return, or the mismatch can draw a notice.
- Paying a large top-up without checking. A top-up in one year can push that year’s total premium above ₹2.5 lakh and cost the exemption.
By the numbers
- ₹2.5 lakh: the aggregate annual premium limit for ULIPs issued on or after 1 February 2021, set by the Finance Act, 2021.
- ₹1.5 lakh: the combined yearly Section 80C deduction cap, as per the Income-tax Act.
- 12.5%: the long-term capital gains rate on gains above ₹1.25 lakh in a year for equity-oriented investments, confirmed for non-exempt ULIPs by Budget 2025.
- 2%: the TDS rate under Section 194DA on the income part of a non-exempt payout above ₹1 lakh, per CBDT rules.
- 5 years: the ULIP lock-in period fixed by IRDAI regulations.
Frequently asked questions
Is ULIP maturity amount taxable?
It is tax-free if the policy passes the Section 10(10D) tests: premium within 10% of the sum assured, and total ULIP premium at or below ₹2.5 lakh a year for policies from 1 February 2021. If either test fails, only the gain is taxed as a capital gain, not the full payout.
What is the ₹2.5 lakh rule for ULIP?
For ULIPs issued on or after 1 February 2021, the maturity payout loses its tax exemption if the total annual premium across all your ULIPs exceeds ₹2.5 lakh in any year. The limit is aggregate, and crossing it in even one year costs the exemption for good.
Is ULIP premium eligible for 80C deduction?
Yes, up to ₹1.5 lakh a year combined with all other 80C items, but only under the old tax regime. Under the new regime, no 80C deduction is available on ULIP premiums.
Is ULIP death benefit taxable?
No. The death benefit paid to the nominee is fully tax-free under Section 10(10D), no matter how large the premium is. The ₹2.5 lakh rule and the 10% test do not apply to death benefits.
What happens if I surrender my ULIP before 5 years?
You do not get the money at once. It goes to a discontinuance fund and is paid after the 5-year lock-in ends, after charges. The payout is taxed under the same Section 10(10D) test as maturity, and any 80C benefit claimed may be affected.
Is ULIP better than mutual funds for tax saving?
A ULIP can be tax-free at maturity, while equity fund gains above ₹1.25 lakh are taxed at 12.5%. But ULIPs carry insurance and fund charges that mutual funds do not. For many buyers, term insurance plus a mutual fund costs less overall, so compare total charges before deciding.
What is TDS on ULIP maturity?
For a non-exempt payout above ₹1 lakh, the insurer deducts 2% TDS under Section 194DA on the income part only, which is the payout minus premiums paid. This TDS is adjusted against your final tax when you file your return.
Are ULIPs bought before February 2021 still tax-free?
Yes, if the premium stayed within 10% of the sum assured for policies from April 2012, or 20% for older ones. The ₹2.5 lakh rule does not apply to pre-2021 ULIPs, so there is no premium ceiling for them.
Official sources
- Income Tax Department: incometax.gov.in — Section 80C, Section 10(10D), and Section 194DA provisions
- Insurance Regulatory and Development Authority of India: irdai.gov.in — ULIP lock-in and discontinuance rules
- Related guides on this site: ELSS tax saving funds, PPF tax benefits, NPS tax benefits, Mutual fund taxation
Reviewed by Asuthod Rathod, CA
Last updated: 3 November 2026
Disclaimer: This article explains tax rules in simple words for general information only. Tax law changes often, and your policy terms matter. Check the official portals above or speak to a qualified tax professional before making a decision based on this guide.
Editorial byline for eircicai tax saving guides — covering 80C investments, ELSS, PPF, NPS, and regime comparison. Content is reviewed by Asuthod Rathod, CA.