Synopsis
- The government of India announced some key updates on how ULIPs are taxed in the budget 2025.
- Any ULIPs which are not meeting Section 10(10D) conditions and irrespective of premium amount will now be treated as capital assets and taxed under capital gains.
- However, ULIPs with annual premiums below ₹2.5 lakh will continue to enjoy tax exemptions under Section 10(10D) of the Income Tax Act, subject to certain terms and conditions.
Tax Benefits on ULIP maturity and premiums
Before we dive deep into the terms and conditions and the details related to ULIP taxation, let us first understand the tax benefits ULIP investors may enjoy.
There may be two major ULIP tax benefits to keep in mind. While one tax benefit may be claimed against the premiums, the other tax advantage may be primarily about ULIP taxation on maturity.
Tax benefit on premiums
Under Section 80C of the Income Tax Act of 1961 (the Act), tax deduction of up to Rs 1.5 lakhs may be claimed against the premiums paid by the policyholder for their life insurance policy, including a ULIP under old tax regime.
Section 80C tax benefits may only be applicable if the premium for a policy bought before 1st April 2012 has a premium of not more than 20% of the death sum assured. The premium for a plan issued after 1st April 2012 may not be more than 10% of the death sum assured.
Tax benefits on maturity
Under Section 10 (10D) of the Act, the prevailing rules regarding the taxability of ULIP on maturity state that the amount received as maturity proceeds from a ULIP may not be taxed subject to certain provisions.
So, if your ULIP meets the terms and conditions, you may not have to be concerned about the taxability of the ULIP maturity proceeds.
However, you may be wondering, what are the terms and conditions under which the ULIP maturity amount is taxable? Let’s understand.
What is Meant by ULIP Taxation on Maturity?
For the unaware, tax exemption may mean that a particular amount received by the individual that may be considered a source of income is not subject to taxation like other income sources.
The maturity proceeds from a ULIP may not be considered as taxable income, and thus, may be exempted from taxation under Section 10 (10D) of the Income Tax Act, 1961. However, the exemption of tax on ULIP maturity proceeds may only be the case if the plan meets all the terms and conditions currently laid out for ULIPs, which are explained below:
If you bought a ULIP after April 1, 2012
Whether your ULIP maturity amount is taxable or not and up to what limit may be determined by when it was issued. If you purchased a ULIP after April 1, 2012 and before 1st February 2021, it may be required that the premium of your plan may not be more than 10% of the death sum assured.
If the premium is more than 10% of the death sum assured, the policyholder may have to pay tax on ULIP maturity proceeds up to a certain limit.
If you bought a ULIP before April 1, 2012
If the ULIP has been bought before the 1st of April 2012, then it may be required that the premium be less than 20% of the death sum assured to be eligible for Section 10 (10D) tax exemption.
For policies purchased before 1st April 2012 and having a premium of more than 20% of the death sum assured, there may be taxation on ULIP maturity proceeds.
As mentioned earlier, the two terms and conditions explained above is required to be complied not only to claim Section 10 (10D) tax exemption but also Section 80C tax deductions.
ULIPs issued on or after February 1, 2021
If the policy has been issued on or after 1st February 2021, the aggregate annual premium may not be more than Rs 2.5 lakhs (one or multiple polices put together) in any given year of the ULIP’s tenure to be eligible for Section 10 (10D) exemption subject to the fact that these policies have sum assured which is 10% of premium.
This condition on the tax on ULIP maturity may also be applicable to policyholders owning multiple ULIPs purchased on or after 1st February 2021. If the aggregate premium of all the policies may be more than Rs 2.5 lakhs (one or multiple polices put together) for any financial year within the policy’s tenure, the maturity proceeds from the same may be taxed as per prevailing norms. Gain from such policy or policies will be treated as Capital Gains depending on underlying assets.
Please note that death benefit payout received by the nominee of such policy if the life insured passes away is exempt from tax under Section 10 (10D) of the Act.
Capital Gains Taxability of ULIP On Maturity
Capital gains tax may be said to be a form of tax levied on certain investments held for a particular period of time. Whether your ULIP primarily constitute equity-oriented or debt-oriented investments, the same are taxed as Long Term Capital Gains @12.5% in the hands of the Policyholder.
The following examples of when a ULIP maturity amount is taxable may help you get a better idea of the taxation rules explained so far.
Example #1:
Mr Abhishek bought a ULIP in January 2013 with the aim to create wealth and secure his family’s financial future. He paid Rs 50,000 as the yearly premium for death sum assured of Rs. 5 lakhs.
When the policy matured, he was able to receive the maturity proceeds tax-free under Section 10 (10D), since his yearly premium was less than 10% of the death sum assured under the plan. During the policy’s tenure, he also claimed Section 80C deductions since he met the eligibility criteria for the tax deduction as well under old tax regime.
Example #2:
Miss Sarika bought a high-value ULIP in August 2021 as a part of her investment and financial security strategy. The premium she would pay each year was Rs 2.7 lakhs for death sum assured of Rs. 27 lakhs.
When the policy matures, the payout received by Miss Sarika would not be tax-exempted. She would have to pay taxes on income from policy because the premium she paid each year was above the prescribed limits of 2.5 lakhs, asper tax laws prevailing at the time of issuance of the policy.
How Will ULIPs Be Taxed After Budget 2025?
ULIPs not covered under Section 10(10D) will be treated as capital assets
ULIPs irrespective of premium amount, if not meeting Section10(10D) conditions (i.e. 10% of premium amount), these policies will now be classified as capital assets. This shift brings ULIPs under capital gains taxation, changing how maturity proceeds are taxed for high-value investors.
Earlier, only ULIPs with annual premiums above ₹2.5 lakh were treated as capital assets and taxed under capital gains. Now, ULIPs with premiums exceeding 10% of the policy value are also considered capital assets, even if the premium is below ₹2.5 lakh.
If your ULIP premium is within the ₹2.5 lakh limit and below 10% of the sum assured, the payout remains tax-free under Section 10(10D).
Taxation as capital gains
If the ULIP is treated as a capital asset, any gains from its sale or redemption will be subject to capital gains tax instead of regular income tax.
An Important Point to Note
Currently, there are two tax regimes in India - the old and the new tax regime.
While the tax benefits on ULIP maturity and death benefit payout under Section 10 (10D) may be applicable under both regimes, Section 80C tax benefit is available only under the old tax regime.
FAQs
Is exemption under Section 10(10D) on ULIP maturity amount received?
The ULIP maturity amount is exempt under Section 10(10D), only when the policy fulfills specific conditions, such as the premium and sum assured limit.
What is the maximum amount for claiming tax deductions under Section 80C for premium amounts?
Under the old tax regime, you can claim up to ₹1.5 lakh in a financial year under Section 80C for ULIP premium payments, subject to eligibility and policy terms.
Is there a tax on the maturity proceeds from ULIPs?
There is no tax when your ULIP fulfils the required conditions under Section 10(D). If not, then they may be taxed under capital gains irrespective of premium amount.
Are the premiums invested in ULIPs eligible for tax deductions?
ULIP premiums qualify for tax deductions under Section 80C, up to ₹1.5 lakh for each financial year, if the policy meets the criteria set by income tax laws. Note that Section 80C is allowed only under the old tax regime.
Is GST also applicable to ULIPs?
In India, GST applies to ULIP premiums. GST is mainly applied on the charges portion.
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