ULIP Tax Benefits 2026: Save Tax Under Section 80C & 10(10D)

Written by : Knowledge Center Team

2025-11-28

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In recent times, ULIPs have become really popular instruments in India. For investors looking for a single product that combines protection with wealth-building potential, ULIPs offer a structured long-term approach, along with tax features that can be attractive, provided the policy qualifies for exemption and doesn’t fall into the taxable (high-premium) category.

Key Takeaways

ULIP premium qualifies for deduction under Section 80C within the overall ₹1.5 lakh limit (applicable to the old tax regime only)
ULIP maturity proceeds may be exempt under Section 10(10D), but high-premium ULIPs (₹2.5 lakh+) issued on/after 1 Feb 2021 may become taxable
Budget 2025 clarified that gains from non-exempt ULIPs are treated as capital gains (as opposed to the ambiguity on the income head)
Death benefit paid to the nominee remains tax-exempt under Section 10(10D) (subject to general exclusions)
“ULIP is EEE/tax-free,” should be avoided as a blanket claim, tax outcome depends on issue date, premium thresholds, and 10(10D) conditions

Best Ways to Minimize IncomeTax through ULIP

What is a ULIP?

A Unit Linked Insurance Plan or ULIP is a unique plan which provides you with an insurance policy along with an investment component. A portion of your premium payment goes toward life cover, and the remainder is invested in funds of your choice. Different insurance companies offer different fund options.

If you are looking to invest in a ULIP for the first time, the Promise4Growth Plus plan is an excellent choice. It offers 3 plan options, 4 premium payment modes, 8 funds, and 4 different portfolio strategies. You have the freedom to choose a combination that suits your financial capabilities and future goals.

It is tax-saving season, and ULIPs are gaining even more popularity now. The main reason is the tax benefits available on eligible ULIPs (subject to policy conditions and the Income Tax Act). Let us first understand what this means.

ULIPs are eligible for EEE status only when they meet the applicable tax conditions (for example, when maturity proceeds qualify for exemption under Section 10(10D)).

This is generally applicable to long-term investments like EPF (Employee Provident Fund), PPF (Public Provident Fund), NPS (National Pension Scheme), etc.

The first exemption applies to investments made in a ULIP. The part of your annual income invested in these instruments becomes tax-deductible. (typically via Section 80C, subject to limits and eligibility)
The second exemption applies to the interest earned on the investment.
The third exemption is based n the income or the maturity amount of the investment upon withdrawal if the policy qualifies for exemption under Section 10(10D); otherwise, maturity proceeds may be taxable.
The most important ULIP tax benefits that you can avail yourself of every year are deductions under Section 80C of the Income Tax Act.

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Did You Know?

From 22 Sept 2025, GST on individual life insurance premiums, including ULIPs, has been reduced to NIL for premiums due on/after that date.

Source: India Today

New Regime for the ULIP Plan Taxation After Budget 2025

ULIPs have been some of the most tax efficient investment options in the country. When you look at the investment options available in a ULIP, you will find an unbeatable market investment option.

Tax benefits on invested amount and withdrawals from the plan meant that you could build wealth virtually tax-free. However, with the new tax amendments, even ULIPs have landed in the ambit of the taxman.

The key change was introduced in the Finance Act, 2021 (Budget 2021), and Budget 2025 further clarified how non-exempt ULIPs should be taxed.

ULIP Returns Can Be Taxable:

Earlier, returns from ULIP were not taxed if your annual investment did not exceed 10% of the sum assured (for policies issued after April 1, 2012, under Section 10(10D)). Further, for ULIPs issued on or after 1st Feb, 2021, the Section 10(10D) exemption did not apply if the premium (or aggregate premium across ULIPs) exceeded ₹2.5 lakh.

If the premium you paid for ULIPs exceeded ₹2.5 lakh, the returns you received were taxed.

Budget 2025 clarifies that gains from such non-exempt ULIPs are treated as capital gains. The limit of ₹2.5 lakhs applies to the combined premium for all plans purchased on or after 1st Feb, 2021. If you have started two ULIP investments after 1st Feb and the total annual premium exceeds ₹2.5 lakhs, both ULIPs will be taxable.

Restriction on Fund Switches:

In most of the ULIPs, there is a fund-switching feature. This enables you to shift between funds if you think you can get better returns. These ‘switches’ were usually free. “However, ULIP can now be taxable” does not automatically mean fund switches are restricted by tax law; switches are typically plan features.

The tax will be determined based on the duration you have held the ULIP for:

Less than 3 years: Chargeable to the tax slab rate
More than 3 years: Chargeable @ 20%.

Tax Rules Regarding Death Benefit:

No changes are made in the tax rules regarding the death benefit that your nominee will receive after your death. The death benefit remains exempt from tax under Section 10(10D) of the Income-tax Act.

How ULIP Taxation Works Now?

How ULIP taxation works now depends mainly on whether the policy qualifies for the Section 10(10D) exemption; if it doesn’t, the maturity proceeds are generally taxed as capital gains, depending on how the ULIP is classified.

Taxation as Per your Funds

The taxes that you will pay on your ULIP returns will depend on the funds chosen by you and the proportion selected.

If your funds’ equity component is more than 65 per cent, they will be taxed as an Equity mutual fund.
In the case of indirect equity investment, i.e., through an ETF, the equity should be at least 90% to be taxed as an Equity mutual fund.
Equity fund investments enjoy long-term capital gains (LTCG) exemption up to ₹1.25 lakh. Any amount above that will be subject to tax at 12.5% for transfers on or after 23 July 2024 (10% applied for certain transfers before 23 July 2024).

Sections 112 and 112A cover the long-term capital gain tax. Here are the tax rates:

	Section	Rate
Profit arising from Units of Equity- Oriented Funds (where taxable)	112A	12.5% (without indexation)
Profit arising from Units of Non-Equity Funds (Debt funds) / other long‑term capital assets	112	20% (without indexation)

What is Indexation?

Indexation is a method by which the purchase price of an asset is adjusted to keep pace with inflation. It helps in determining the actual gain or loss you incur on an investment. The Cost Inflation Index (CII) is used to calculate indexation. The government decides on one year as the base and all the following years are assigned different values according to inflation.

Tax Exemption Under Section 80C

The new tax amendments have not changed the deductions under Section 80C. You can still avail of deductions of up to ₹1.5 lakhs towards the premium paid by you as per the rules under section 80C of the Income Tax Act. But the following conditions should be taken care of-

Section 80C includes deductions from the total of all the investments you own

ULIP Tax Benefits Other than Section 80C

With the new tax rules on ULIPs announced in 2021 (and further clarified in Budget 2025), there have been changes in maturity benefits.

If the premium paid by you in a year is less than ₹2.5 lakh, the returns will be tax-free u/s 10(10)D. But in case the premium is higher than ₹2.5 lakh in a year, the maturity proceeds may become taxable (subject to the conditions, including the aggregate premium rule across ULIPs issued on/after 1 Feb 2021).

Apart from the dual benefit of getting a life cover as well as investment opportunities, ULIPs provide you with tax benefits as well. However, following the recent amendments, there have been changes to taxation.

Changes after 2021’s budget have affected the maturity benefit as well. Let’s take a look at the maturity taxability of ULIP.

ULIP Maturity Taxability

Taxability of ULIP on maturity depends primarily on when the policy was issued and whether the maturity proceeds qualify for ULIP tax exemption under Section 10(10D), subject to the applicable conditions.

1. ULIPs Starting Before 1st February 2021

The amount received on the maturity of your ULIP is generally free from tax as per section 10(10D) of the Income Tax Act, 1961, if the policy meets the applicable conditions.
This is applicable if the premium that you pay every year is less than 10% of the sum assured you will receive (for policies issued on or after 1 April 2012).
For the ULIPs that are purchased before April 2012, the rate is 20%.

2. ULIPs Starting On or After 1st February 2021

Following the amendments to the 2021 budget, returns from your ULIP will be taxed if the premium you pay in a year exceeds ₹2.5 lakhs.
ULIP proceeds will now be charged as a Capital gain in cases where Section 10(10D) exemption does not apply; Budget 2025 further clarifies/rationalises this capital-gains treatment, with stated effect from 1 April 2026 (AY 2026–27 onwards).
If the amount of returns exceeds ₹1.25 lakh, the tax will be charged @12.5% in case of equity investments and 20% for others.
This is subject to the directions by the government and the applicable Income Tax Act provisions for the relevant assessment year.
Death benefits remain tax-exempt under Section 10(10D).

If you purchased a ULIP before February 1st, 2021, you can continue to access the benefits available under the pre-taxation.

ULIPs can still be tax-efficient for long-term planning when they qualify for Section 10(10D) exemption, but high-premium ULIPs may be taxable.

Conclusion

ULIP tax benefits can be valuable, but they work best when the policy is chosen for long-term goals and structured to meet the applicable tax conditions. Make sure the premium deduction claim fits within the overall Section 80C limit and that you understand when maturity proceeds remain exempt under Section 10(10D) versus when they can be taxed (especially for high-premium ULIPs issued on/after 1 February 2021).

Before investing, compare charges, fund options, and protection needs, and review the policy document carefully to ensure the plan aligns with your financial goals and the latest tax rules.

Glossary

Section 80C: Deduction up to ₹1.5L for specified investments/expenses (incl. insurance/PPF etc.).
Section 10(10D): Exempts eligible life insurance/ULIP maturity proceeds from income tax, subject to conditions.
EPF: Govt-backed employee retirement savings scheme; contributions and interest build a provident fund corpus.
PPF: Govt-backed long-term savings scheme with 80C benefit; 15-year tenure and tax advantages.
Indexation: Inflation-adjusting an asset’s cost using CII to compute taxable capital gains more fairly.

FAQs

For those asking, “Are ULIP returns tax-free?” The answer is no; it depends on whether the ULIP qualifies for Section 10(10D) exemption (and other conditions).

If the Section 10(10D) exemption doesn’t apply (e.g., certain high-premium ULIPs), maturity proceeds can be taxable. Budget 2025 also clarifies the tax treatment of non-exempt ULIPs for capital gains purposes.

For ULIPs issued on/after 1 Feb 2021, the ulip 2.5 lakh tax exemption condition matters: if the premium paid in any year is within ₹2.5 lakh (and other conditions are met), then ULIP returns are tax-free under Section 10(10D).

If the premium crosses ₹2.5 lakh (as applicable), Section 10(10D) exemption may not apply, and the ULIP tax-free returns claim won’t hold, returns/maturity proceeds may become taxable (typically discussed under capital gains for such ULIPs).

Under Section 80C, the deduction for ULIP premium is within the overall ₹1.5 lakh limit (shared with other eligible 80C items), so this is not a “tax-free return” limit but a premium-deduction cap.

For maturity proceeds, tax-free treatment is via Section 10(10D) if conditions are met; for ULIPs issued on/after 1 Feb 2021, the ₹2.5 lakh premium condition is a key qualifier.

Yes, Tax Deducted at Source TDS on ULIP maturity amount is applicable if the proceeds are not exempt from income tax under Section 10(10D) of the Income-tax Act, 1961.

ULIPs issued before 1 Feb 2021: maturity can be exempt under Section 10(10D) if applicable conditions are satisfied (like the premium-to-sum-assured condition based on issue date).
ULIPs issued on/after 1 Feb 2021: if the ₹2.5 lakh condition is breached, Section 10(10D) exemption may not apply, and maturity proceeds can be taxed; Budget 2025 clarifies non-exempt ULIPs’ gains as capital gains.

ULIPs offer tax benefits on premiums only under the old tax regime. At the same time, the maturity amount may be tax-exempt under both regimes, subject to the specific conditions under Section 10(10D) (as applicable).

The death benefit is entirely tax-free for the nominee under both regimes under Section 10(10D).

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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