A unit-linked insurance plan (ULIP) is a combination of life insurance and investment, with part of the premium invested in market-linked funds such as equity, debt or balanced/hybrid funds. ULIPs are usually chosen by investors seeking insurance coverage along with the potential for wealth creation.
Ulips are increasingly adopting a -like approach, launching new fund offers and mirroring mutual fund categorisation. The tax treatment of ULIPs depends on factors such as the annual premium, the date on which the policy was issued, and whether the policy satisfies the conditions for exemption under the income tax law.
When are ULIP proceeds exempt from tax?
As per revisions made during the Finance Act, 2021, the tax treatment of ULIPs issued on or after 1 February 2021 depends largely on the annual premium. If the annual premium paid towards one or more ULIPs does not exceed ₹2.5 lakh, the maturity proceeds will qualify for tax exemption, meaning the amount received post maturity will be tax-free.
However, if the annual premium exceeds ₹2.5 lakh, the ULIP loses this exemption and is treated as a capital asset for taxation. The gains arising on redemption or maturity are then taxed as long-term capital gains at 10% on the portion above ₹1 lakh, according to Cleartax.
The tax rules on ULIP were further widened in the Union Budget 2025. Earlier, only ULIPs with annual premiums above ₹2.5 lakh were treated as capital assets. Under the revised provisions, certain whose premiums exceed 10% of the policy value will also fall within the taxable category. As a result, investors should consider both the premium amount and policy structure to determine the tax treatment of their ULIP proceeds.
After the amendment, the maturity proceeds of ULIP plans where policies are issued on or after 1 February 2021, will no longer be exempt, in case:
- If the investor has paid a premium of more than ₹2.5 lakh in any year during the tenure of the ULIP, the amount received (including the bonus) at maturity will be taxable.
- If you have purchased multiple ULIP plans and the aggregate premium paid exceeds ₹2.5 lakh, then it will be considered taxable.
No taxation upon death
Investors must also note that no taxation is imposed if maturity proceeds are received upon the death of an individual.
How to report such gains in ITR?
Here are the steps an investor must follow if they want to report ULIP proceeds in their income tax filing:
- Verify TDS details: Check Form 26AS or Annual Information Statement (AIS) for TDS deducted by the insurer on maturity proceeds.
- Determine taxability: Assess whether the maturity proceeds qualify for exemption under Section 10(10D). If applicable, you will be able to declare the amount as exempt under the “exempt income” section.
- Choose the correct ITR form: Use -1 for exempt amounts and for income that meets the requirements. You should use ITR-2 or ITR-3 if the proceeds are taxable.
- Report under ‘Income from Other Sources: Include taxable maturity amounts here if they do not meet the exemption criteria.
Source: Bajaj Finserv