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ULIPs offer life insurance with market-linked returns, along with tax benefits under Sections 80C and 10(10D).
ULIPs (Unit Linked Insurance Plans) are financial products that provide life insurance coverage along with market-linked investment options such as equity, debt, or hybrid funds.
The taxability of ULIP depends on specific conditions under the Income Tax Act, including the premium amount and policy structure.
With the introduction of the INR 2.5 lakh premium threshold and updated capital gains rules, it is important to understand when ULIP returns are tax-free and when they are taxable.
A ULIP, or Unit Linked Insurance Plan, is a financial product that combines life insurance coverage with market-linked investments in equity, debt, or hybrid funds. A portion of the premium provides life cover (sum assured) for your family, while the remaining amount is invested in funds chosen by the policyholder, similar to mutual funds.
Premiums paid towards a ULIP are eligible for deduction under Section 80C, and maturity or proceeds on death of the policyholder can be tax-free under Section 10(10D), subject to conditions.
Before 2021, ULIP taxation was relatively simple, with no upper limit on premium for claiming tax exemption. The key benefits were:
ULIP taxation in India was updated in Budget 2025 (effective 1 April 2026), introducing a framework where tax treatment depends on the premium amount and policy eligibility.
For a simple and convenient way to manage your funds alongside your investments, you can open a bank account online with DBS Bank using the DBS digibank app for a seamless digital banking experience.
To understand how taxes apply to ULIP policyholders, it is important to look at the different stages of the policy: investment, accumulation, withdrawal, surrender, and death. This helps in identifying the applicable ULIP tax benefits and exemptions at each stage.
Mutual funds and ULIPs differ in how the returns are taxed, here’s a clear comparison between both the funds:
Aspect
ULIPs
Equity Mutual Funds
Tax on returns
Tax-free if premium ≤ INR 2.5 lakh; otherwise taxed as capital gains
Always taxed as capital gains
LTCG tax
12.5% (if taxable, above INR 1.25 lakh)
12.5% (above INR 1.25 lakh)
STCG tax
20% (if taxable)
20%
Tax during investment
No tax; fund switching is tax-free
No tax until redemption; switching is taxable
Tax deduction
Eligible under Section 80C (up to INR 1.5 lakh)
Not available
To better understand the tax calculation of ULIP, the following example shows how returns are taxed when the premium exceeds the prescribed exemption limit:
Scenario:
Step 1: Check tax eligibility
Step 2: Calculate gains
Step 3: Apply tax rules
You can open a new savings account with DBS Bank to manage your finances and tax payments seamlessly in one place. DBS Bank India enables direct tax payments through the DBS digibank app, covering Income Tax, Advance Tax, Self-Assessment Tax, and TDS, with real-time confirmation and secure processing.
ULIP taxation has evolved from a largely tax-free structure to a conditional framework based on premium limits. Policies within the INR 2.5 lakh threshold continue to offer tax efficiency, while higher premiums attract capital gains tax. Understanding these rules helps you assess returns accurately and choose ULIPs that align with your investment horizon, risk profile, and tax planning needs.
To balance market-linked investments like ULIPs, you can also consider a DBS Bank Savings Account offering top savings account interest rates, helping you manage liquidity while earning steady returns on idle funds.
