ULIPs aren’t tax-free above ₹2.5 lakh and that changes everything for investors. Explained

Thought ULIPs offered tax-free returns no matter what? Not anymore. If your annual premium exceeds ₹2.5 lakh, those returns may now be taxed—shaking up how investors should view Unit Linked Insurance Plans.

Sujit Bangar, founder of TaxBuddy.com, broke down the tax rules around ULIPs in a detailed LinkedIn post, urging investors to rethink assumptions about these hybrid insurance-investment products.

Here’s what you need to know:

1. Section 80C – Premium Deduction:
Premiums paid are eligible for deduction up to ₹1.5 lakh under Section 80C, but only if the premium is ≤10% of the sum assured and the policy isn't surrendered within 5 years.

2. Section 10(10D) – Tax-Free Maturity?
The golden rule post-Budget 2021: ULIP maturity proceeds are tax-free only if total annual premiums (across all ULIPs) stay under ₹2.5 lakh. If they cross this, tax kicks in.

3. Capital Gains Tax Applies:
If your premium exceeds ₹2.5 lakh, maturity proceeds are taxed—at 12.5% long-term capital gains (LTCG) if held over 12 months, or 20% short-term capital gains (STCG) if held for less.

4. Fund Switches:
Switches between ULIP funds are tax-free only if your policy qualifies under Section 10(10D. Otherwise, they’re treated as redemptions—and taxed.

5. Death Benefit:
Still fully exempt from tax, regardless of premium size.

6. Early Surrender = Tax Hit:
Surrendering before 5 years? You lose 80C benefits, and the payout is taxed as income.

7. Budget 2021 Changed the Game:
Earlier, all ULIP maturity proceeds were exempt. Now, those above the ₹2.5 lakh threshold are taxed like mutual funds, to block tax-free equity exposure for high-net-worth individuals (HNIs).

8. ULIP vs Mutual Funds:
The old tax edge of ULIPs is now gone. Mutual funds offer more transparency, lower costs, and simpler taxation—unless you’re seeking insurance with built-in discipline.