ULIPs have remained popular among investors who want life insurance along with market-linked investment growth in a single plan. Over the years, many people also preferred ULIPs because of their tax benefits. However, ULIP taxation has been affected under the newer income tax rules, especially for certain high-premium policies, and these rules continue to apply in 2026.
A common misunderstanding is that every ULIP plan automatically gives tax-free maturity benefits. That is no longer fully true. The taxation of a ULIP now depends on factors like the policy issue date, aggregate annual premium amount, and whether the policy qualifies under Section 10(10D) of the Income Tax Act.
For some ULIPs issued on or after February 1, 2021, maturity proceeds may become taxable if aggregate annual premiums cross ₹2.5 lakh in a financial year. Because of these changes, it has become important to understand how a ULIP may be taxed before investing for the long term.
What Changed in ULIP Taxation?
The biggest taxation change applies to ULIPs issued on or after February 1, 2021. The government introduced these rules mainly for high-premium ULIPs.
Under the current rules, if the aggregate annual premium paid towards ULIPs exceeds ₹2.5 lakh in a financial year, the maturity proceeds may lose tax exemption under Section 10(10D).
This means some ULIPs may no longer offer fully tax-free maturity amounts.
However, ULIPs can still continue to receive tax-exempt maturity benefits if:
- The aggregate annual premium stays within the ₹2.5 lakh limit
- The policy satisfies the applicable premium-to-sum-assured conditions
For policies issued after April 1, 2012, the premium generally should not exceed 10% of the sum assured to qualify for tax exemption benefits.
ULIPs issued before February 1, 2021 generally continue under the older taxation structure if they meet the required conditions. In many such cases, maturity proceeds still remain tax-free.
This is why the policy purchase date and annual premium amount have become very important while evaluating ULIPs.
How Are Taxable ULIPs Treated?
If a ULIP scheme loses exemption under Section 10(10D), the income received at maturity or redemption is treated as capital gains under current tax rules. The exact tax treatment depends on prevailing capital gains provisions and the structure of the policy.
This means taxable ULIPs are treated more like market-linked investment products from a taxation perspective.
The final tax calculation can vary depending on the policy structure and applicable tax rules at the time of maturity. Because of this, investors should understand the taxation structure of their specific policy instead of assuming all ULIPs are taxed in the same way.
One important point is that death benefits received by nominees generally continue to remain tax-exempt under applicable income tax provisions, including in many high-premium ULIPs. This helps preserve the insurance protection aspect of the policy.
How the New Tax Regime Affects ULIPs
Another area that often creates confusion is the difference between premium deductions and maturity taxation.
ULIP premiums can qualify for deduction under Section 80C, but this benefit is available only under the old tax regime. Investors choosing the new tax regime cannot claim Section 80C deductions on ULIP premiums.
However, this does not mean ULIPs lose all tax advantages under the new regime.
Even under the new tax regime, eligible ULIPs may still receive tax exemption on maturity proceeds if they satisfy the required conditions under Section 10(10D).
In simple terms:
- Section 80C deduction depends on the chosen tax regime
- Maturity tax exemption depends on whether the ULIP qualifies under Section 10(10D)
Both work separately and should be understood separately.
What Should Investors Keep in Mind?
The newer taxation rules have made it important to evaluate ULIPs beyond only their tax-saving benefits.
Before buying a ULIP, investors should check:
- The aggregate annual premium amount
- Whether aggregate annual premiums may cross ₹2.5 lakh
- The policy issue date
- Insurance coverage offered
- Investment goals
- Lock-in period
- Available fund options
- Chosen tax regime
ULIPs continue to offer features such as life insurance coverage, market-linked investment growth, long-term investing discipline, and fund-switching flexibility.
However, taxation should now be viewed as one part of the decision-making process rather than the only reason to invest.
Conclusion
ULIP taxation has become more structured under the current income tax framework. While many ULIPs continue to offer tax-efficient maturity benefits, tax exemption is no longer automatic for every policy, especially in the case of high-premium ULIPs issued after February 1, 2021.
The tax treatment now depends on factors such as aggregate annual premium amount, policy structure, issue date, and eligibility conditions under Section 10(10D). At the same time, ULIPs continue to remain relevant for investors looking for a combination of life insurance coverage and market-linked wealth creation.
Understanding these taxation rules properly can help investors make more informed long-term financial decisions and avoid unexpected tax liability at the time of maturity.