Are ULIP Returns Tax-Free? Understanding Section 10(10D) Rules

When you invest in a ULIP, you're combining life cover with the potential for market-linked growth, a balance many families value when planning for the long term. Yet a common question remains: are ULIP returns tax-free when the policy matures? The taxation of ULIP returns depends on premium limits and compliance with Section 10(10D) of the Income-tax Act, which governs the taxation of life insurance payouts. Understanding these rules helps you assess ULIPs alongside other tax-saving investments. 

Tax Treatment of ULIPs on Maturity, Death, and Partial Withdrawals 

ULIP maturity proceeds are eligible for tax-benefits if certain conditions are met. Under Section 10(10D) of the Income Tax Act of 1961, ULIP maturity proceeds are eligible for tax-benefits  only If a ULIP policy issued on or after the 1st day of April, 2012 in respect of which the premium paid for any of the years during the term of the policy does not exceeds 10% of the actual capital sum assured and; If  ULIPs issued on or after 1 February 2021, this exemption applies only when the combined annual premium across all ULIPs does not exceed ₹2.5 lakh for all the years during the tenure of all these policies. The taxable gain is calculated as the maturity value minus total premiums paid. 

If these conditions are satisfied, the entire maturity amount is eligible for tax-exemption. Otherwise, maturity proceeds in equity-oriented ULIPs are taxed as long-term capital gains and taxed at 12.5% on gains exceeding ₹1.25 lakh. On the other hand, debt-oriented ULIPs are taxed at the individual’s Income Tax Slab rate  (as per 2023 budget changes for debt oriented insurance). 

As long as we're diving deeper into the tax treatment of ULIP on maturity, it is important to note that death benefits from ULIPs are fully exempt from tax under Section 10(10D). This exemption is irrespective of premium or sum assured limits. This ensures nominees receive the entire payout without complications. 

Partial withdrawals made after completing the mandatory five-year lock-in period follow similar rules. ULIPs surrendered before the lock-in period are taxed at the individual's applicable income tax slab, and any Section 80C deductions (under old tax regime) claimed earlier are reversed. However, this payout is withheld until the 5th year of the policy. Until then, the fund value is transferred to a Discontinuance Policy Fund (DPF). 

For compliant policies, withdrawals remain tax-exempt. For non-compliant policies, the gains part is subject to capital gains tax. Understanding these ULIP tax benefits helps investors plan withdrawals and maturity outcomes more effectively. 

ULIP Taxation and Other Tax-Saving Investments 

Comparing ULIP taxation rules with other Section 80C options helps one clearly understand how different products are taxed at maturity. Traditional instruments such as PPF and NSC follow the EEE model, where contributions, returns, and maturity proceeds are fully or largely tax-exempt. ULIPs, however, offer conditional tax exemptions under Section 10(10D). 

ELSS mutual funds, while eligible for Section 80C deductions, attract long-term capital gains tax at 12.5% on gains exceeding ₹1.25 lakh. In contrast, ULIP maturity tax can be nil if premium-related conditions are met. The table below outlines how tax treatment differs across common tax-saving investments. 

The right choice depends on your financial goals, time horizon, and whether you need insurance cover alongside investment growth. 

Conclusion 

While ULIPs offer tax efficiency, they are not universally tax-free. ULIP returns can be tax-exempt under Section 10(10D) if the annual premium is under ₹2.5 lakh and does not exceed 10% of the sum assured. Death benefits remain fully tax-free regardless of premium amounts. For investors evaluating market-linked insurance options, a ULIP for long-term growth would be a helpful starting point. 

Frequently Asked Questions 

1. Are ULIP returns tax-free in India? 

ULIP returns in India are tax-exempt only when certain conditions are met. For policies issued on or after 1 February 2021, the total annual premium across all ULIPs must remain within ₹2.5 lakh for all the years during the tenure of all these policies and should not exceed 10% of the sum assured. Policies that meet these limits qualify for tax exemption under Section 10(10D). 

2. Is the ULIP maturity amount taxable? 

The ULIP maturity proceeds become taxable if the annual premium exceeds ₹2.5 lakh (for policies issued after 1 February 2021) or if the premium exceeds 10% of the Sum Assured. In these cases, the gains are treated as Capital Gains. 

3. Is the death benefit from ULIP taxable? 

No. Death benefits received from ULIPs are completely exempt from tax under Section 10(10D), regardless of premium limits.