ULIP vs Traditional Endowment: Tax Treatment Under Finance Act 2025

For two decades, life insurance maturity proceeds were the cleanest tax-free instrument available to a salaried Indian. Section 10(10D) of the Income-tax Act, 1961 simply said: keep premium within 10 percent of the sum assured and the maturity payout was exempt. Finance Act 2021 broke that rule for unit-linked plans. Finance Act 2023 broke it for traditional endowment plans. Finance Act 2025 has retained both caps without dilution, locking in a regime where the tax outcome depends on three variables — when the policy was issued, the annual premium, and whether the contract is a ULIP or a traditional plan. This deep dive walks through the working law as of AY 2026-27.

The Rule / Product

Section 10(10D) still grants the headline exemption, but two provisos now carve out high-premium policies. The first proviso, inserted by Finance Act 2021, applies to ULIPs issued on or after 1 February 2021. The second proviso, inserted by Finance Act 2023, applies to non-ULIP life policies issued on or after 1 April 2023.

For ULIPs, the threshold is Rs 2,50,000 of aggregate annual premium across all ULIP contracts held by the same individual. For traditional endowment, money-back, and whole-life policies, the threshold is Rs 5,00,000 of aggregate annual premium across all such non-ULIP policies. Once aggregate premium crosses the relevant cap in any single financial year of the policy term, the maturity proceeds permanently lose Section 10(10D) exemption.

The taxation that replaces the exemption is different for the two product classes.

ULIPs that breach the Rs 2,50,000 cap are deemed "capital assets" under Section 2(14)(c) and the gain on maturity or surrender is taxed under Section 112A if the underlying fund is equity-oriented (at least 65 percent equity exposure on average), or as per the slab-rate route prescribed by Rule 8AD if it is debt-oriented. CBDT Notification 8/2022 dated 18 January 2022 inserted Rules 8AB, 8AC and 8AD for the capital-gain computation. The Section 112A rate stands at 12.5 percent on gains above Rs 1,25,000 per financial year, post Budget 2024 (effective 23 July 2024).

Traditional policies that breach the Rs 5,00,000 cap are taxed differently. Section 56(2)(xiii), inserted by Finance Act 2023, treats the sum received minus aggregate premiums paid (excluding amounts already claimed as deduction under any other provision) as "income from other sources" — taxed at the applicable slab rate, with no Section 112A relief and no Rs 1,25,000 exemption. CBDT Circular 15/2023 dated 16 August 2023 read with Rule 11UACA lays down the computation rules and clarifies how multiple policies are aggregated.

Critically, Section 10(10D) continues to exempt the death benefit on both classes, regardless of premium quantum. Both provisos start with "any sum received under a life insurance policy issued on or after 1 February 2021/1 April 2023, other than the sum received on the death of a person". Only the survivor's maturity or surrender proceeds are touched by the new provisos.

Why It Matters

The two thresholds — Rs 2.5 lakh for ULIPs and Rs 5 lakh for traditional plans — were set deliberately high so that a typical middle-income buyer would not be touched. But three buyer profiles cross them routinely.

The first is the high-net-worth individual using ULIPs as a tax-free debt parking vehicle. Before Finance Act 2021, an HNI could pay Rs 10 lakh annual premium into a 99 percent debt ULIP, hold it for ten years, and receive the entire corpus tax-free under Section 10(10D). Now the same contract is taxed at slab rate on gains. For a 30 percent slab taxpayer, the post-tax IRR drops by roughly 200 basis points relative to the pre-2021 position.

The second is the corporate executive whose employer pays an annual premium of Rs 6 lakh as part of a retention-linked endowment owned by the employee. Under the second proviso, this single policy crosses the Rs 5 lakh cap and the entire maturity gain is taxable at slab rate.

The third is the bunch-buyer — a salaried professional who picks up two endowment plans of Rs 3 lakh premium each from different agents. Aggregation under the second proviso pulls the combined premium of Rs 6 lakh into the taxable bracket, even though no single policy crosses Rs 5 lakh on its own.

The Section 80C premium deduction (capped at Rs 1,50,000 per year) is available only under the old tax regime; the default new regime under Section 115BAC offers no premium deduction at all. The 10-percent-of-sum-assured rule under Section 80C(3A) — which limits deductible premium to 10 percent of the actual capital sum assured for policies issued on or after 1 April 2012 — continues unchanged under Finance Act 2025.

To work out whether a specific ULIP makes sense versus a mutual fund SIP after the new regime, our ULIP vs MF calculator builds in both the 12.5 percent equity-oriented LTCG and the slab-rate debt path, plus the 80C deduction differential.

Worked Numbers

Case A — ULIP, Rs 3 lakh annual premium, equity-oriented

A 35-year-old buys a Rs 30 lakh sum-assured equity-oriented ULIP on 5 May 2024 with annual premium Rs 3,00,000 for 10 years, and surrenders at the end of year 15. Assume a fund return of 11 percent CAGR, premiums paid at year-end, and the policy meets the 10-percent-of-sum-assured cover ratio.

Because the annual premium of Rs 3 lakh exceeds the Rs 2.5 lakh ULIP cap, Section 10(10D) does not apply. The gain is taxed under Section 112A. The pre-tax IRR of the contribution stream stands at 11 percent; the post-tax IRR works out to roughly 10.05 percent — a friction of about 95 basis points purely from the 12.5 percent LTCG rate plus cess.

Case B — Traditional endowment, Rs 6 lakh annual premium

A 40-year-old buys a Rs 70 lakh sum-assured non-linked endowment on 10 June 2024 with annual premium Rs 6,00,000 for 12 years, and the policy matures at year 20. Assume a maturity payout of Rs 1,38,00,000 (an implied IRR of approximately 5 percent — typical of a large-ticket non-par endowment under the IRDAI standard benefit illustration). The taxpayer is in the old regime, top slab, with no surcharge breach from this single event.

Section 56(2)(xiii) deducts only premiums "not claimed as deduction under any other provision" — the Rs 18 lakh already used to anchor the 80C limit is therefore not available again at maturity. CBDT Circular 15/2023 makes this explicit. The same policyholder under the new regime would have had no 80C claim to begin with, so the entire Rs 72 lakh premium would offset the Rs 1.38 crore consideration, dropping Section 56(2)(xiii) income to Rs 66 lakh — a counter-intuitive case where the new regime delivers a smaller tax bill on this single event.

Comparison at a glance

Pitfalls

• Aggregation across policies is automatic. The cap applies to the aggregate annual premium across all ULIPs (or all traditional policies) held by the same individual, not policy-by-policy. Two Rs 3 lakh endowments together breach the Rs 5 lakh cap.

• Election within the cap. Where a buyer holds multiple ULIPs whose aggregate premium exceeds Rs 2.5 lakh, Rule 8AB read with the first proviso to Section 10(10D) lets the policyholder elect which ULIPs to retain inside the Rs 2.5 lakh exemption envelope. The unselected ULIPs fall outside Section 10(10D) and the gains are taxed under Section 112A or Rule 8AD as applicable.

• Old policies are protected. ULIPs issued before 1 February 2021 and traditional policies issued before 1 April 2023 are unaffected. The provisos use the issue date of the policy, not the date of premium payment.

• The 10-percent-of-sum-assured rule is separate. Section 10(10D)(c) and Section 80C(3A) require the premium to be 10 percent of the actual capital sum assured (20 percent for pre-April 2012 policies; 15 percent for policies on the lives of disabled persons under Section 80U or those with specified diseases under Section 80DDB). A high-premium ULIP that fails this ratio loses 10(10D) regardless of the Rs 2.5 lakh cap.

• 80C is old-regime only. Under Section 115BAC (the new default tax regime), no premium deduction is available. New-regime taxpayers cannot claim Rs 1,50,000 under 80C at all.

• Surrender before five years revives 80C reversal. Section 80C(5) reverses the deduction if the policy is surrendered within two years (traditional) or five years (ULIP) of inception. The reversed deduction is added to income in the year of surrender and the lost premium tax shield can no longer be set off against the maturity proviso later.

• Pension policies follow Section 80CCC, not 80C. Annuity proceeds from a pension plan are taxable as income — Section 10(10D) does not exempt them, and the Rs 2.5 lakh ULIP cap does not apply because pension policies are governed under a separate Chapter VI-A section.

• GST on premium is excluded from the cap. Premium payments include 18 percent GST on the risk-cover portion (4.5 percent on the first-year premium of single-premium endowments under Notification 12/2017-CT(R)). Only the net premium counts for the Rs 2.5 lakh / Rs 5 lakh cap test under Rule 8AD.

• Health rider premiums are separately deductible. Riders for critical illness or hospitalisation under the same policy fall under Section 80D, not 80C, and have a separate Rs 25,000 / Rs 50,000 cap. They do not eat into the 80C limit but also do not reduce the Rs 2.5 lakh / Rs 5 lakh cap on the base policy premium.

• NRI surrenders trigger Section 195 TDS. For an NRI surrendering an Indian-issued ULIP that breaches the cap, the insurer must deduct tax under Section 195 at 12.5 percent on the LTCG (equity-oriented funds). India retains taxing rights on these gains under most DTAAs.

For the Section 10(10D) sum-assured ratio test, the Term Insurance Premium calculator shows the exact 10 percent threshold given any sum assured. For a standalone health policy outside the ULIP wrapper, the Health Insurance Premium calculator computes 80D deduction across all family members.

Earlier deep dives on the IRDAI claim settlement ratio FY 2024-25, the 3-year pre-existing disease cap and Section 45 non-disclosure traps cover the underwriting and claims side.

FAQ

Does the Rs 2.5 lakh ULIP cap apply if I bought my ULIP in 2018?

No. The first proviso to Section 10(10D), inserted by Finance Act 2021, applies only to ULIPs "issued on or after 1 February 2021". Pre-February 2021 ULIPs continue to enjoy the unconditional Section 10(10D) exemption, subject only to the standard 10-percent-of-sum-assured ratio test under Section 10(10D)(c).

Is the Section 80C deduction available in the new tax regime?

No. Section 115BAC, which became the default regime from FY 2023-24 onwards and was retained by Finance Act 2025, withdraws every Chapter VI-A deduction except 80CCD(2) (employer NPS contribution) and 80JJAA. The Rs 1,50,000 life insurance premium deduction under 80C is available only if you opt out of Section 115BAC and file under the old regime.

Can I claim Section 80C on premium that was used to buy a policy whose maturity is now taxable?

Yes. Section 80C is a deduction at the time of payment and the premium-stage shelter survives even if the maturity-stage proviso applies. However, Section 56(2)(xiii) reduces the maturity consideration only by premiums "not claimed as deduction under any other provisions" — so the deducted portion is not available a second time at maturity.

Does the Rs 5 lakh traditional cap reset every year?

No. The cap is annual but the test runs across the entire policy term. Finance Act 2023 phrasing is: in any previous year during the term of the policy, if the premium exceeds Rs 5 lakh, the policy permanently loses Section 10(10D). Once breached, the maturity is taxed even if subsequent years' premium falls below Rs 5 lakh.

Are death benefits taxable if the deceased had a Rs 10 lakh ULIP?

No. Death claims under Section 10(10D) remain exempt regardless of premium quantum. Both provisos explicitly carve out "the sum received on the death of a person".

How is the gain computed on a part-surrender of a ULIP?

CBDT Notification 8/2022 read with Rule 8AD prescribes a proportionate cost-of-acquisition method. The cost attributable to the surrendered units is the units-surrendered ratio multiplied by aggregate premium paid up to that date, net of amounts already taxed in earlier withdrawals. The taxable gain is the surrender consideration minus this attributable cost.

Will employer-paid premium count towards my Rs 2.5 lakh ULIP cap?

If the policy is in the employee's name and vests in the employee, employer-paid premium counts towards the cap. If the employer is the proposer of a key-man contract, the employee cap rules do not apply — but the maturity proceeds are taxed in the employer's hands under Section 28(vi).