ULIP Taxation Rules & 2.5 Lakh Tax Exemption (2025 Guide)

Unit-linked insurance Plans (ULIPs) are specialised financial products that combine life insurance with investment opportunities. Policyholders participating in these schemes benefit from multiple tax advantages under Section 80C and Section 10(10D). 

For instance, if you pay a ULIP premium of ₹2.5 lakh or less, you can enjoy a tax-free maturity corpus under Section 10(10D) of the Income Tax Act. However, to qualify for this benefit, you must be invested in a plan issued on or after 1 February 2021. 

To obtain more information regarding the ULIP 2.5 lakh tax exemption, please continue reading.

Quick Synopsis

• ULIP premiums are eligible for tax deduction up to ₹1.5 lakh per year under Section 80C of the Income Tax Act.
• Maturity proceeds are tax-free under Section 10(10D) if the ULIP premiums are below ₹2.5 lakh annually.
• Death benefits paid to nominees under ULIPs are fully exempt from tax, regardless of premium amount or date of purchase.

Taxability of ULIP 

As per the provisions of the Income Tax Act, 1961, ULIPs offer several tax benefits. Section 80C of the IT Act allows ULIP policyholders to include their premiums under tax deductions, subject to certain conditions. These include:

You can claim tax deductions of up to ₹1.5 lakh per financial year. But, remember that this is considered not only for your ULIP premium but also for other eligible expenses and investments.

Whether you receive tax advantages will depend on whether you initiated ULIP investments before or after 1st April, 2012.

• ULIPs Purchased Before 1st April, 2012: The tax deduction limit under Section 80C is capped at 20% of the sum assured for ULIPs bought before the specified date. When the annual premium goes above 20% of the sum assured, the deduction will be restricted to a maximum of 20%. 

• ULIPs Purchased After 1st April, 2012: To be eligible for a Section 80C deduction, the yearly premium should not exceed 10% of the sum assured. When the premium surpasses 10% of the assured sum, a tax deduction is only applicable to the portion that is up to 10% of the sum assured.

Taxability of ULIP on Maturity 

Understanding taxation in ULIP is not limited solely to Section 80C of the Income Tax Act. While Section 80C governs the tax implications of premiums paid towards ULIPs, it is important to understand the effect of Section 10(10D) to determine how the maturity proceeds are taxed.

Tax Benefits on ULIP Maturity Amount for Plans on/Before February 1, 2021

If you had bought ULIPs by this date, you would enjoy tax-free maturity benefits under Section 10(10D), no matter how much you have paid in premiums throughout the policy's term.

ULIP Tax Benefit Under 2.5 Lakh for Plans Issued on/After February 1, 2021

You can leverage the ULIP 2.5 lakh tax exemption return upon paying premiums that are below ₹2.5 lakh. This exemption applies to the maturity amount of your scheme. However, if your yearly premium exceeds ₹2.5 lakh in any given year during the ULIP tenure, your maturity benefits will become taxable according to the fourth provision of Section 10(10D).

Tax Deductions for Multiple ULIPs Issued on/After February 1, 2021

If you want to receive ULIP 2.5 lakh tax exemption with more than one ULIP, then the cumulative premium should remain below ₹2.5 lakh. 

ULIP Tax Exemption After Death

Regardless of the premium paid, the sum a nominee receives upon the policyholder's death is entirely exempt from tax under Section 10(10D).

Should You Invest in ULIP? 

Investing in a ULIP can be a strategic choice if you are seeking a product that combines life insurance protection with market-linked investment prospects. These instruments offer flexibility to allocate your premiums across equity, debt, or balanced funds based on your risk appetite. 

To date, market analysts project an annualised return in the range of 10-12% for a 10-year ULIP. In addition, they come with attractive tax benefits, including deductions up to ₹1.5 lakh under Section 80C and potential tax-free maturity proceeds under Section 10(10D). Therefore, ULIPs can be beneficial for long-term investors (at least 5 years). 

Besides, ULIPs give liquidity options like partial withdrawals and fund switching. These features make them a decent choice for those looking to grow wealth while ensuring financial well-being for their families. However, you should assess charges, market risks, and your insurance needs before investing.

For short and mid-term financial goals, you can rely on fixed deposits offered by Stable Money. We offer FDs from RBI-approved banking institutions, and you can open an FD online in minutes and earn up to 8.40% p.a., all with the safety and assurance of regulated institutions.