Unit Linked Insurance Plans (ULIPs) continue to attract attention as hybrid financial products combining investment potential with protection. While their appeal lies in market-linked returns alongside life cover, recent updates in tax laws have changed how the maturity proceeds of ULIP insurance are treated. Let us explore how ULIPs currently qualify for tax benefits and what policyholders must know to stay compliant.

Understanding ULIP insurance and its dual nature

Before diving into tax details, it’s important to grasp the life insurance definition in the context of ULIPs. A ULIP is a contract where a portion of your premium provides life cover, and the remaining portion is invested in equity, debt, or balanced funds. This blend of insurance and investment makes ULIPs unique. However, since part of the premium is market-linked, returns are not guaranteed.

Previous tax treatment of ULIPs

Until 31 January 2021, ULIPs were treated favourably under Indian tax laws. The maturity proceeds from any ULIP plan—irrespective of the premium amount—were exempt under Section 10(10D) of the Income Tax Act. Moreover, policyholders could claim deductions on premiums up to Rs. 1.5 lakh per annum under Section 80C.

This structure allowed many high-net-worth individuals to funnel large sums into ULIPs, reaping market returns without paying any tax on maturity.

Finance Act 2021: Introduction of premium limits

To prevent the misuse of this tax exemption, the Finance Act, 2021 introduced a key amendment: if the annual premium for a ULIP policy issued after 1 February 2021 exceeds Rs. 2.5 lakh, the maturity proceeds will no longer be fully exempt.

Here are the major points:

• ULIP plans issued on or after 1 February 2021 are subject to revised tax rules.
  
• If annual premium exceeds Rs. 2.5 lakh in any financial year during the policy term, maturity proceeds become taxable.
  
• If you have multiple ULIPs and their combined premium exceeds Rs. 2.5 lakh annually, the exemption is lost on all such policies.
  
• However, ULIPs bought before 1 February 2021 remain exempt under the older rules.
  

What is taxed and how?

Maturity proceeds of affected ULIPs will now attract long-term capital gains (LTCG) tax at 10% on gains exceeding Rs. 1 lakh. This taxation treatment aligns ULIPs with equity mutual funds and shares.

There is an important caveat: no tax applies if the proceeds are received due to the life assured’s demise during the policy term. The protective feature of ULIPs remains intact.

Example-based clarity

Let’s understand with a few real-world examples:

• Mr A pays Rs. 1 lakh annually for a ULIP and receives Rs. 20 lakh after 10 years. Since his annual premium never exceeds Rs. 2.5 lakh, his maturity proceeds are tax-free.
  
• Mr B, on the other hand, pays Rs. 3 lakh annually and receives Rs. 48 lakh at maturity. His tax liability is on Rs. 18 lakh (Rs. 48 lakh minus Rs. 30 lakh paid over 10 years), taxed at 10% under LTCG rules.
  

In cases where an individual owns multiple policies (ULIP X, Y, and Z) with combined premiums over Rs. 2.5 lakh, only the policies that stay within this combined threshold will enjoy tax exemption.

What stays unchanged?

• Deductions under Section 80C are still available for premiums paid, up to Rs. 1.5 lakh per year.
  
• The death cover benefit remains tax-free under Section 10(10D), regardless of the premium amount.
  
• Policyholders with older ULIP plans (issued before Feb 2021) are unaffected by these changes.
  

Why this amendment matters

This amendment was introduced to prevent high-income investors from bypassing capital gains tax by routing large market-linked investments through ULIPs. With this update, the government ensures a fair tax structure while still retaining ULIPs’ appeal for genuine insurance buyers.

Conclusion

ULIP insurance remains a tax-efficient tool for long-term financial planning—provided you stay within the premium threshold. By understanding the latest rules and aligning your policy choices accordingly,you can enjoy the dual benefits of protection and investment without facing unnecessary tax liabilities. 

For those seeking flexible coverage with growth potential, ULIPs continue to be a viable option under India’s evolving tax regime.