ULIPs with Annual Premiums Above ₹2.5 Lakhs to Be Taxed Like Equity Mutual Funds: What It Means for Investors
Under the revised provisions introduced in Budget 2025, certain ULIPs with higher premium commitments will now be taxed similarly to equity mutual funds. If you already own a ULIP or are considering buying one, understanding these changes is essential for making informed investment decisions.
For years, Unit Linked Insurance Plans (ULIPs) enjoyed a favourable tax status, making them an attractive option for investors seeking insurance protection along with market-linked wealth creation. However, recent amendments have brought greater clarity to the taxation of high-value ULIPs.
Under the revised provisions introduced in Budget 2025, certain ULIPs with higher premium commitments will now be taxed similarly to equity mutual funds. If you already own a ULIP or are considering buying one, understanding these changes is essential for making informed investment decisions.
Understanding the New Tax Rule for High-Premium ULIPs
Budget 2025 clarified that ULIPs that do not qualify for exemption under Section 10(10D) of the Income-tax Act will be treated as equity-oriented funds for taxation purposes.
In simple terms, if your ULIP premium exceeds prescribed limits, gains earned at maturity or redemption may no longer be completely tax-free.
This clarification primarily affects ULIPs issued on or after February 1, 2021.
What is Section 10(10D)?
Section 10(10D) provides tax exemption on amounts received from life insurance policies, including maturity proceeds and bonuses. It also ensures that death benefits received by nominees remain tax-free.
However, this exemption is available only if certain conditions are met.
For ULIPs, the exemption is not available when:
- The aggregate annual ULIP premium paid exceeds ₹2.5 lakh for policies issued on or after February 1, 2021.
- The annual premium payable exceeds 10% of the actual capital sum assured.
If either of these conditions is violated, the maturity proceeds become taxable.
How Will High-Premium ULIPs Be Taxed?
The biggest takeaway from Budget 2025 is that non-exempt ULIPs will now be taxed in the same manner as equity-oriented mutual funds.
The following tax structure applies:
| Particulars | Tax Treatment |
| Long-term capital gains exceeding ₹1.25 lakh annually | Taxed at 12.5% |
| Short-term capital gains (holding period below 12 months) | Taxed at 20% |
| Death benefit received by nominees | Fully exempt from tax |
This clarification removes uncertainty regarding the taxation of gains arising from high-value ULIPs.
Why Was This Clarification Necessary?
Before Budget 2025, there was confusion regarding the taxation of ULIPs that failed to meet Section 10(10D) conditions.
Some experts believed gains should be taxed as capital gains, while others argued they should be considered “Income from Other Sources” and taxed according to the individual’s income slab.
The latest amendment settles this debate.
Now, qualifying ULIPs will be treated as capital assets, ensuring gains are taxed at concessional capital gains rates rather than higher marginal tax rates.
For investors paying substantial premiums, this is a relatively favourable outcome.
Which ULIP Holders Are Likely to Be Affected?
Not every ULIP investor will experience a change in taxation.
The revised provisions mainly affect:
- High-net-worth individuals purchasing large-ticket policies
- Investors holding multiple ULIPs whose combined annual premiums exceed ₹2.5 lakh
- Policyholders investing aggressively for wealth creation purposes
For instance, suppose an investor pays:
- Policy A premium – ₹1.50 lakh annually
- Policy B premium – ₹1.25 lakh annually
The aggregate ULIP premium becomes ₹2.75 lakh in a financial year.
Since the total premium exceeds ₹2.5 lakh, maturity proceeds from these policies may become taxable, subject to applicable conditions.
Does Fund Allocation Within ULIPs Matter?
Yes. The Finance Bill indicates that to qualify as an equity-oriented fund, at least 65% of the invested assets should remain allocated to equities throughout the policy term.
This means the tax treatment may depend on the underlying investment composition.
Consider the following illustration:
| Fund Allocation | Possible Tax Characterisation |
| More than 65% invested in equities | Equity-oriented taxation |
| Predominantly debt allocation | Different treatment may apply |
| Balanced allocation with sufficient equity exposure | Equity-oriented taxation possible |
Investors should periodically review their asset allocation strategy, particularly if they actively switch between fund options.
Understanding ULIP taxation becomes increasingly important for policyholders with sizeable investments.
Will Endowment Plans Also Be Taxed Similarly?
No. The clarification specifically applies to ULIPs. Traditional endowment plans that fail to satisfy Section 10(10D) conditions continue to be taxed differently.
Any gains arising from such policies are generally treated as “Income from Other Sources” and added to the investor’s taxable income. These amounts are taxed according to the applicable slab rate.
Therefore, the favourable capital gains treatment introduced for certain ULIPs does not extend to conventional life insurance products.
Are Death Benefits Still Tax-Free?
Yes. One important aspect remains unchanged.
Irrespective of the annual ULIP premium paid, death claim proceeds received by nominees continue to enjoy complete tax exemption under Section 10(10D).
This ensures that the primary objective of life insurance, financial protection for loved ones, remains intact.
Should Investors Still Consider ULIPs?
Absolutely. Taxation is only one aspect of evaluating an investment product.
Modern unit linked insurance plans continue to offer several advantages:
- Integrated life insurance protection
- Market-linked growth opportunities
- Fund switching flexibility
- Disciplined long-term investing
- Goal-oriented wealth accumulation
However, investors should carefully assess premium commitments and expected tax implications before investing.
Using a unit linked insurance plan calculator can help estimate potential returns, understand premium affordability, and determine whether a particular policy aligns with long-term financial objectives.
Conclusion
The Budget 2025 clarification brings much-needed certainty to the taxation of high-value ULIPs. Policies with aggregate annual premiums exceeding ₹2.5 lakh and not qualifying for Section 10(10D) exemption will now be taxed similarly to equity mutual funds, making their treatment more transparent and predictable.
For investors, this means paying closer attention to premium amounts, fund allocation patterns, and policy issuance dates. While the tax-free advantage may no longer apply to certain policies, ULIPs can still remain an effective wealth creation and protection tool when chosen thoughtfully.
Before committing to a high-premium policy, evaluate your investment goals, insurance requirements, and likely tax liability to ensure your ULIP strategy remains efficient and aligned with your long-term financial plan.
