High value ULIP

A ULIP is usually sold as an insurance policy with tax-free proceeds. That is only true up to a point.

Where the premiums get large enough, the Finance Act treats the policy less like insurance and more like an investment — and taxes it that way. The workbook calls this a high value ULIP.

Who is affected. Only ULIP policies issued on or after 1 February 2021. Older policies are untouched.

The trigger. The premiums of all a person's affected ULIP policies are added together. If that combined premium does not exceed Rs 2,50,000 in a year, the old Section 10(10D) exemption keeps applying as before.

Once the aggregate crosses Rs 2,50,000, the policy is treated as a capital asset. An equity-oriented high value ULIP — one that keeps the same 65%/90% listed-equity character throughout its term — gets a 12-month long-term holding period, taxed at 12.5% on long-term gains and 20% on short-term gains. A non-equity-oriented high value ULIP follows the ordinary capital gains rules instead: slab rates for short-term, 12.5% for long-term.

Death benefit stays exempt. Whatever the premium, any sum received on death remains exempt under Section 10(10D) — this rule only bites on maturity and surrender proceeds.

The Finance Act, 2025 closed a remaining gap. From FY 2025-26, any ULIP that does not qualify for the Section 10(10D) exemption is treated as a capital asset by definition, settling what had been an open question about whether such maturity proceeds were capital gains or income from other sources.

Illustrative figures. Ms Kapoor buys two ULIPs on 1 March 2021, paying annual premiums of Rs 1,50,000 and Rs 1,50,000 — Rs 3,00,000 combined, above the Rs 2,50,000 line. Both are high value ULIPs.

One of them is equity-oriented and she surrenders it after 3 years, making a gain of Rs 4,00,000.

Holding period                    36 months (long-term, > 12 months)
Gain                               Rs 4,00,000
Tax rate                           12.5%
Tax                                 Rs 50,000

Had her combined premium instead been Rs 2,00,000 — below the Rs 2,50,000 line — the same Rs 4,00,000 gain would have been entirely exempt under Section 10(10D), with no tax at all. Crossing the Rs 2,50,000 line by even a small margin brings the full gain into the tax net.

Chapter 12 (Taxation of Other Products), section 12.8, sets out the high value ULIP rules immediately after the general Section 10(10D) exemption for life insurance proceeds, including the 1 February 2021 cut-off and the Rs 2,50,000 aggregation test. Expect a question testing whether a given combination of ULIP premiums crosses the threshold, and the tax rate that then applies.

• The Rs 2,50,000 test aggregates all of a person's affected ULIP premiums together, not just one policy in isolation.
• Death benefit is always exempt, whatever the premium — the high value rule only affects maturity and surrender.
• Only policies issued on or after 1 February 2021 are in scope. An older, larger-premium ULIP is unaffected.
• This is a distinct rule from the general equity-oriented fund definition, though the two share the same 65%/90% equity test and the same 12.5%/20% rates once a ULIP qualifies as equity-oriented.