A Unit Linked Insurance Plan (ULIP) blends life protection with market‑linked investment. After the mandatory five‑year lock‑in, policyholders can withdraw the maturity or surrender proceeds. However, the money they receive is not automatically tax‑free.
The Union Budget presented on 1 February 2021 and later enacted through the Finance Act 2021 introduced new rules for high‑premium ULIPs. If the annual premium exceeds Rs 2.5 lakh, the maturity or surrender proceeds, along with any interest earned, may lose the tax exemption.
Section 10(10D) of the Income‑Tax Act gives a tax break on payouts from life insurance policies, including ULIP maturity proceeds and bonuses. Only plans that meet the prescribed conditions qualify for this exemption.
When a ULIP’s annual premium goes beyond Rs 2.5 lakh, the exemption under Section 10(10D) is lost. The policyholder still enjoys a preferential tax treatment, but the proceeds are no longer fully tax‑free.
Because the withdrawal occurs after the five‑year lock‑in, the holding period is longer than one year. Thus, the gains qualify as long‑term capital gains (LTCG). Only the amount that exceeds the exempt threshold is taxed, and it is taxed at the concessional LTCG rate rather than the individual’s income slab.
Another point to note is the impact on earlier 80C deductions. If you claimed an 80C deduction for ULIP premiums in past years, that deduction is reversed and added back to your taxable income in the year you withdraw or surrender. This is a partial claw‑back of the tax benefit you received earlier.
Aditya Bhattacharya, partner at King Stubb & Kasiva, advises taxpayers to review the premium limits, the date of issuance, and the insurer’s statements before claiming any exemption. Incorrect reporting can trigger queries from the tax authorities.
In short, ULIP proceeds after the lock‑in period are taxable unless the plan meets Section 10(10D) conditions and the premium stays below Rs 2.5 lakh. Understanding these rules helps you file your ITR accurately and avoid unnecessary scrutiny.