Key Takeaways
- ULIPs issued on or after 1 February 2021 lose the Section 10(10D) exemption if the annual premium exceeds Rs 2.5 lakh in any year of the policy term. Maturity proceeds on such ULIPs are taxed as capital gains under Section 112A.
- For AY 2026-27 filings, the applicable rates under Section 112A are 12.5% LTCG on gains above Rs 1.25 lakh per year (holding period 12 months+) and 20% STCG (holding period under 12 months).
- ULIPs issued before 1 February 2021 remain fully exempt under Section 10(10D), regardless of the premium amount.
- Death benefit is always tax-free under Section 10(10D)(d) regardless of premium amount or issue date.
- Taxable ULIP gains are reported in Schedule CG of ITR-2 (or ITR-3 if you have business income). Insurers also report ULIP maturity payouts to the income tax department, so reconcile your AIS before filing.
ITR season for AY 2026-27 (FY 2025-26) is the period when many policyholders discover that their old assumption about ULIPs being a tax-free investment no longer holds. The Section 10(10D) exemption was capped for high-premium ULIPs by the Finance Act 2021, and the capital gains framework that now applies was rewritten by the Finance (No. 2) Act 2024 with effect from 23 July 2024. This guide explains exactly which ULIPs are taxable, which are still exempt, how to compute the gain, and where to report it in your return.
When a ULIP Loses Its Section 10(10D) Exemption
A ULIP is a unit-linked insurance plan that bundles life cover with market-linked investment. Historically, both the maturity proceeds and the death benefit on a ULIP were fully exempt under Section 10(10D) of the Income Tax Act 1961.
The Finance Act 2021 amended Section 10(10D) for ULIPs issued on or after 1 February 2021. The new rule has three conditions:
- The ULIP is issued on or after 1 February 2021.
- The annual premium payable in any one year during the policy term exceeds Rs 2.5 lakh.
- If the policyholder holds multiple ULIPs, the aggregate annual premium across all such ULIPs is tested against the Rs 2.5 lakh threshold.
If all three conditions are met, the Section 10(10D) exemption is not available on maturity proceeds. The proceeds are instead taxed as capital gains under Section 112A.
Worked rule: If you hold two ULIPs issued in 2022 with annual premiums of Rs 1.5 lakh and Rs 1.5 lakh, the aggregate is Rs 3 lakh. Both ULIPs together lose the Section 10(10D) exemption. You can choose, at the time of issue, which policy or policies the exemption applies to, subject to the aggregate cap.
ULIPs Issued Before 1 February 2021
ULIPs issued before 1 February 2021 are grandfathered. Section 10(10D) continues to apply in full, irrespective of the annual premium. Maturity proceeds and death benefits on these policies are exempt.
This is the single most important date check before filing. Pull your policy issue date from the policy bond or your insurer portal. If the issue date is before 1 February 2021, the proceeds do not enter Schedule CG at all and you do not need ITR-2 for this reason.
How High-Premium ULIPs Are Taxed: Section 112A
For ULIPs that fail the Section 10(10D) test, the Finance Act 2021 treats them as equity-oriented funds for tax purposes (provided the underlying funds invest at least 65% in domestic listed equity). The gain on redemption is taxed under Section 112A, the same section that governs listed equity shares and equity mutual funds.
Section 112A was amended by the Finance (No. 2) Act 2024 with effect from 23 July 2024. The rates that apply for AY 2026-27 are:
| Holding Period | Tax Treatment | Rate |
|---|---|---|
| 12 months or more | LTCG under Section 112A | 12.5% on gain above Rs 1.25 lakh per year |
| Under 12 months | STCG under Section 111A | 20% flat |
The Rs 1.25 lakh exemption threshold is a per-financial-year aggregate across all your Section 112A gains, not just your ULIP. If your equity mutual fund LTCG already crossed Rs 1.25 lakh, the entire ULIP LTCG component is taxed at 12.5%.
For ULIPs where the underlying funds do not meet the 65% equity threshold (predominantly debt-oriented ULIP funds), the proceeds are taxed as non-equity capital gains. LTCG is 12.5% flat under Section 112 (holding period 24 months+); STCG is at slab rate.
Death Benefit Stays Tax-Free
Section 10(10D)(d) explicitly preserves the exemption for the sum received on the death of the insured person, regardless of the policy issue date and regardless of the annual premium. If a ULIP holder dies and the nominee receives the policy proceeds, the entire amount is tax-free.
This is the one carve-out that has not been touched by either the Finance Act 2021 or the Finance (No. 2) Act 2024.
How to Compute the Capital Gain
The capital gain on a taxable ULIP is computed as:
Capital Gain = Net Maturity Proceeds, Aggregate Premiums Paid
The aggregate premiums paid include all premiums across the full policy term. The mortality charges deducted by the insurer are part of the cost; they are not added back.
Worked example. Ramesh buys a ULIP in March 2022 with an annual premium of Rs 4 lakh for a 10-year term. He pays Rs 4 lakh annually for 10 years, total premiums of Rs 40 lakh. The policy matures in March 2032 at Rs 65 lakh.
The annual premium of Rs 4 lakh exceeds Rs 2.5 lakh, so Section 10(10D) is not available. The policy is treated as an equity-oriented fund (assuming 65% equity allocation). Holding period is 10 years, so this is LTCG under Section 112A.
Capital gain = Rs 65 lakh, Rs 40 lakh = Rs 25 lakh.
Assuming no other Section 112A gains in that financial year, the first Rs 1.25 lakh is exempt and the balance Rs 23.75 lakh is taxed at 12.5%. Tax = Rs 2,96,875 (excluding surcharge and cess).
Where to Report in ITR-2
ULIP capital gains are reported in Schedule CG of ITR-2 (use ITR-3 if you also have business or professional income). The structure of Schedule CG separates:
- Section A for short-term capital gains. ULIPs held under 12 months go here under the equity-oriented fund head.
- Section B for long-term capital gains. ULIPs held 12 months or more go here under Section 112A.
Within Section 112A, the form asks for scrip-wise or fund-wise details, including the ISIN of the underlying scheme where available. For ULIPs, insurers typically provide a statement at the time of maturity showing aggregate premiums paid and the proceeds. Keep this statement on file along with the original policy bond.
The Rs 1.25 lakh exemption under Section 112A is computed automatically by the ITR utility once all Section 112A entries are filled.
AIS Reconciliation Before Filing
Insurers are required to report high-value life insurance maturity payouts to the income tax department through the SFT (Statement of Financial Transactions) mechanism and TDS filings (Section 194DA, where applicable). That data flows into your Annual Information Statement (AIS) on the income tax portal.
Before filing your return, log into incometax.gov.in, download your AIS, and check that the ULIP maturity proceeds reported by your insurer match what you are about to report in Schedule CG. A mismatch will trigger a notice under Section 143(1)(a) or, in serious cases, a Section 139(9) defective return notice.
If your insurer reports an amount that you believe is incorrect (for example, they have not netted off premiums or have classified the policy wrongly), raise a correction request with the insurer before filing your return. You can also mark the AIS entry as Information is not correct from the AIS Feedback option on the portal.
ULIP vs Equity Mutual Fund Tax Comparison
A common question for AY 2026-27 filers is whether the post-2021 ULIP is still worth holding versus an equity mutual fund. The tax outcomes are now largely the same:
| Feature | High-Premium ULIP (post 1-Feb-2021) | Equity Mutual Fund |
|---|---|---|
| LTCG holding period | 12 months | 12 months |
| LTCG rate | 12.5% above Rs 1.25 lakh/year | 12.5% above Rs 1.25 lakh/year |
| STCG rate | 20% | 20% |
| Section under which taxed | 112A | 112A |
| Death benefit | Tax-free under Section 10(10D)(d) | N/A |
| Lock-in | 5 years (regulatory) | No lock-in (open-ended schemes) |
| Switching between funds within the product | Tax-free (intra-policy switch) | Each switch is a taxable redemption |
| Charges | Mortality + fund management + admin | Total expense ratio only |
The intra-policy fund switch tax efficiency is the one structural advantage that ULIPs retain over mutual funds. The cost trade-off is the mortality charge and the higher overall expense load. For taxpayers who want pure investment exposure, an equity mutual fund typically delivers a similar tax result at lower cost; for taxpayers who genuinely want bundled life cover with the ability to rotate between equity and debt without triggering tax, the ULIP still has a use case.
See our related guides:
- Capital Gains Tax India AY 2026-27: LTCG, STCG Guide
- AIS vs Form 26AS vs TIS: ITR Prep Guide AY 2026-27
- Common ITR Filing Mistakes That Trigger Notices
FAQs
Frequently Asked Questions
I bought a ULIP in 2018 with a Rs 3 lakh annual premium. Are the maturity proceeds taxable?
No. The policy was issued before 1 February 2021, so Section 10(10D) applies in full. The maturity proceeds are exempt regardless of the premium amount.
My ULIP issued in 2022 has an annual premium of Rs 2 lakh. Is the maturity exempt?
Yes. The annual premium does not exceed Rs 2.5 lakh, so Section 10(10D) is available. The proceeds are exempt.
I hold two ULIPs issued in 2022, each with Rs 2 lakh annual premium. What happens at maturity?
Your aggregate annual premium is Rs 4 lakh, which exceeds Rs 2.5 lakh. You can elect (typically at issue or at maturity) which policy or policies the Section 10(10D) exemption applies to, subject to the Rs 2.5 lakh aggregate. Premium in excess is treated as a high-premium ULIP and the corresponding maturity proceeds are taxed under Section 112A.
Is the death benefit on a high-premium ULIP taxable?
No. Section 10(10D)(d) preserves the exemption for sums received on the death of the insured person, irrespective of policy issue date or premium amount.
Which ITR form should I use if my ULIP maturity is taxable?
Use ITR-2 if you have only salary, capital gains and other non-business income. Use ITR-3 if you also have business or professional income. ITR-1 (Sahaj) does not allow capital gains other than agricultural income up to Rs 5,000, so it cannot be used when ULIP capital gains apply.
How do I find out my aggregate premiums paid over the years?
Insurers issue a maturity statement at the time of payout listing total premiums received. You can also generate a premium history from your insurer portal. Save this statement, the policy bond, and the bank credit advice as supporting evidence in case of a Section 142(1) query.
My insurer has reported a number in my AIS that I disagree with. What should I do?
Raise a feedback in the AIS itself marking the entry as Information is not correct, and in parallel contact your insurer to correct the underlying SFT or TDS filing. Do not file the return until the AIS is corrected, or be ready to explain the difference in a Section 143(1)(a) intimation.
Let Tax Garden Handle Your ULIP-Linked ITR
ULIP taxation hinges on the policy issue date, the annual premium history, the underlying fund classification, and the AIS reconciliation. A single misclassification, treating a post-2021 high-premium ULIP as exempt, is enough to trigger a Section 143(1)(a) intimation and a recomputed demand. Tax Garden pulls your policy documents, classifies each ULIP correctly under the Section 10(10D) and Section 112A rules, computes the capital gain, files Schedule CG in ITR-2 or ITR-3, and reconciles against your AIS before submission. See our ITR plans or talk to our team.
Sources verified
This guide reflects the Section 10(10D) and Section 112A position as set out in the Income Tax Act 1961 as amended by the Finance Act 2021 and the Finance (No. 2) Act 2024, the CBDT rules notified for taxation of ULIP maturity proceeds, and ITR-2/ITR-3 utility schemas published on incometax.gov.in for AY 2026-27. Practical commentary on AIS, Form 1A reporting and the equity-oriented fund classification has been cross-checked against ClearTax, Tax2win and BajajFinserv guidance current at the time of writing. Confirm specific premium-history workings with your insurer's maturity statement before filing.
