What Are the Tax Benefits on ULIP Plan Maturity?

Unit Linked Insurance Plans (ULIPs) sit at the intersection of insurance and investment. They help investors build long-term wealth while providing life cover. But one of the biggest reasons ULIPs remain popular is their tax efficiency, especially at maturity.

That said, tax rules around ULIPs have evolved in recent years, and not all ULIPs enjoy tax-free maturity anymore. Understanding the current framework is essential before you invest—or redeem.

Let’s break it down simple terms.

What Is a ULIP? (Quick Recap)

A ULIP combines:

• Life insurance cover
• Market-linked investment (equity, debt, or hybrid funds)

Your premium is split between:

• Insurance protection
• Investment units, which grow based on market performance

ULIPs typically have a long-term horizon, with a mandatory 5-year lock-in.

Tax Benefits on ULIP Premiums (Section 80C)

Premiums paid for ULIPs are eligible for deduction under Section 80C, subject to:

• Maximum limit of ₹1.5 lakh per financial year
• Premium should not exceed:
  • 10% of sum assured (for policies issued after 1 April 2012)

This benefit applies regardless of whether the maturity proceeds are taxable or tax-free.

Tax Treatment of ULIP Maturity Proceeds

1. ULIPs Issued Before 1 February 2021

For these ULIPs:

• Maturity proceeds are fully tax-free under Section 10(10D)
• Provided the premium does not exceed the prescribed percentage of sum assured

This made older ULIPs one of the most tax-efficient long-term products.

2. ULIPs Issued On or After 1 February 2021

Tax rules changed significantly for high-premium ULIPs.

If Annual Premium Is Up to ₹2.5 Lakh

• Maturity proceeds remain tax-free under Section 10(10D)
• All conditions regarding sum assured must be met

If Annual Premium Exceeds ₹2.5 Lakh

• Maturity proceeds become taxable
• Treated as capital gains, not insurance income
• Equity-oriented ULIPs:
  • LTCG taxed at 10% beyond ₹1 lakh
• Debt-oriented ULIPs:
  • Taxed as per applicable capital gains rules

👉 This change was introduced to prevent ULIPs from being used purely as tax-free investment vehicles.

Taxation of Partial Withdrawals

• Partial withdrawals after the 5-year lock-in are generally tax-free
• However, for high-premium ULIPs (post-2021), taxation may apply depending on structure and fund allocation

Always check policy documents before making withdrawals.

Tax on Death Benefit

Regardless of premium amount or issue date:

• Death benefits from ULIPs are fully tax-free
• Covered under Section 10(10D)

This remains one of the strongest tax advantages of ULIPs.

Key Conditions to Keep in Mind

For ULIP maturity to remain tax-exempt:

• Policy should not be terminated early
• Premium-to-sum-assured ratio must be maintained
• Policy must comply with prevailing tax rules at the time of issuance

Breaking these conditions can lead to loss of tax benefits.

Who Should Consider ULIPs for Tax Efficiency?

ULIPs make sense for:

• Long-term investors with a 10–15 year horizon
• Individuals looking for insurance + investment
• Investors who value tax-efficient compounding
• Those comfortable with market-linked returns

They may not suit short-term investors or those seeking guaranteed returns.

Key Takeaway

ULIP maturity proceeds can still be tax-free, but only if you stay within the current rules. Older ULIPs continue to enjoy full tax exemption, while newer high-premium ULIPs are taxed like market investments.

Understanding when your ULIP was issued and how much premium you pay is the key to avoiding surprises at maturity.

FAQs: Tax Benefits on ULIP Maturity

1. Is ULIP maturity tax-free?

Yes, if the policy meets Section 10(10D) conditions and annual premium does not exceed ₹2.5 lakh (for post-2021 ULIPs).

2. Are ULIPs issued before 2021 fully tax-exempt?

Yes, subject to sum-assured conditions.

3. What happens if ULIP premium exceeds ₹2.5 lakh?

Maturity proceeds are taxed as capital gains.

4. Is the death benefit from ULIP taxable?

No. Death benefits are always tax-free.

5. Do ULIPs still offer Section 80C benefits?

Yes, premiums are eligible for deduction up to ₹1.5 lakh per year.