Is ULIP Taxable? The ₹2.5 Lakh Rule (2026)
Short answer: ULIPs bought on or after 1 February 2021 are tax-free only if your total annual ULIP premium stays within ₹2.5 lakh[Sec 10(10D)]. Cross that line and the maturity is taxed as capital gains — 12.5% LTCG above ₹1.25 lakh[Sec 45(1B)]. Budget 2025 made this treatment uniform for every non-exempt ULIP from 1 April 2026. Check your own policy below.
Check your ULIP: exempt or taxable?
Taxable as capital gains
Not exempt: aggregate annual ULIP premium exceeds ₹2,50,000, so gains are taxed as capital gains under Section 45(1B).
Gains: ₹3,00,000
Taxable (after ₹1.25L exemption): ₹1,75,000
Estimated tax (LTCG 12.5%): ₹21,875
Death benefits paid to a nominee are always exempt, with no premium condition. Estimates exclude cess/surcharge. This checker reflects rules for redemptions from 1 April 2026 (Finance Act 2025).
ULIP tax rules by issue date
| Policy issued | Exemption test | If test fails |
|---|---|---|
| Before 1 Feb 2021 | Premium ≤ 10% of sum assured (no ₹2.5L test) | Capital gains under Sec 45(1B) from 1 Apr 2026 (FA 2025) |
| On/after 1 Feb 2021 | Premium ≤ 10% of sum assured AND aggregate annual ULIP premium ≤ ₹2.5 lakh | Equity-oriented capital gains: LTCG 12.5% over ₹1.25L (Sec 112A) or STCG 20% (Sec 111A) |
Death benefits are always exempt. Aggregation across multiple ULIPs per CBDT Circular No. 2/2022.
How ULIP tax is worked out
Two gates decide exemption: the 10% ratio (annual premium vs sum assured) and, for post-Feb-2021 policies, the ₹2.5 lakh aggregate premium across all ULIPs. Fail either and gains (proceeds − premiums paid) are taxed as equity-oriented capital gains: 12.5% LTCG above ₹1.25 lakh if held over 12 months, else 20% STCG.
Worked example
ULIP bought March 2022, annual premium ₹3,00,000 (only ULIP held), sum assured ₹30,00,000, matures at ₹23,00,000 after total premiums of ₹15,00,000.
₹2.5L test: ₹3,00,000 > ₹2,50,000 → exemption lost. Gains = ₹23,00,000 − ₹15,00,000 = ₹8,00,000. Held >12 months → LTCG: (₹8,00,000 − ₹1,25,000) × 12.5% = ₹84,375 (plus cess).
Had the premium been ₹2,40,000, the entire ₹23 lakh would have been tax-free under Section 10(10D).
Frequently Asked Questions
Is ULIP maturity taxable in India?
It depends on when the policy was issued and how much premium you pay. ULIPs issued before 1 February 2021 are tax-free under Section 10(10D) if the annual premium is within 10% of sum assured. For ULIPs issued on or after 1 February 2021, there is an extra test: if your aggregate annual premium across all ULIPs exceeds ₹2.5 lakh, the maturity is taxed as capital gains.
What is the ₹2.5 lakh ULIP rule?
Finance Act 2021 added provisos to Section 10(10D): for ULIPs issued on or after 1 February 2021, if the aggregate premium payable in any year across all your ULIPs exceeds ₹2,50,000, the exemption is lost for the policies causing the breach. Gains are then taxed under Section 45(1B) as capital gains.
How are taxable ULIP gains taxed?
High-premium ULIPs are treated as equity-oriented funds. Held over 12 months: long-term capital gains at 12.5% on gains above ₹1.25 lakh (Section 112A, rates per Finance (No. 2) Act 2024). Held 12 months or less: short-term capital gains at 20% (Section 111A).
What changed for ULIPs in Budget 2025?
The Finance Act 2025 closed an ambiguity: from 1 April 2026, ALL ULIP proceeds not exempt under Section 10(10D) are taxed as capital gains under Section 45(1B) — including policies that failed the 10% premium-to-sum-assured test, which some had argued fell outside the capital-gains net.
Is the ₹2.5 lakh limit per policy or across all ULIPs?
Across all ULIPs issued on or after 1 February 2021, combined. CBDT Circular No. 2/2022 explains the aggregation: if you hold multiple ULIPs, the exemption applies only to policies whose combined premium stays within ₹2.5 lakh, chosen to your best advantage.
Is the ULIP death benefit taxable?
No. The amount received on the death of the insured is always exempt under Section 10(10D), with no premium condition — regardless of the ₹2.5 lakh threshold or the 10% ratio.
Do ULIP partial withdrawals count?
Yes — amounts received under a non-exempt high-premium ULIP, including partial withdrawals and surrender values, fall under Section 45(1B) capital-gains treatment. The 5-year lock-in affects when you can withdraw, not the tax treatment.
Related tools & guides
Sources & References
Legal basis: Section 10(10D) provisos 4-5 and Section 45(1B), Income Tax Act, 1961 (Finance Act 2021); Finance Act 2025 clarification effective 1 April 2026; Sections 111A/112A rates per Finance (No. 2) Act 2024; CBDT Circular No. 2/2022 (aggregate premium computation).
Official sources
Last verified against official sources: July 2026. Figures are researched from the government sources above and checked before publishing. See our Editorial & Verification Policy.
This page and checker are for informational and educational purposes only and reflect the law as verified on the date shown above. Estimates exclude cess and surcharge. Consult a qualified tax professional before acting. This is not financial or tax advice.