ULIP Maturity Tax Rules 2026: How the ₹2.5 Lakh Premium Proviso Taxes Your Policy as Capital Gains

By Nitish Bharadwaj · Published Sep 19, 2026 · 6 min

ULIPs issued on or after February 1, 2021 lose their Section 10(10D) exemption if the annual premium exceeds ₹2.5 lakh in any policy year — a lower threshold than the ₹5 lakh aggregate cap for traditional life insurance plans. Once breached, the maturity gain is taxed as capital gains under Section 112A instead of ordinary income: long-term gains above ₹1.25 lakh at 12.5%, short-term gains at 20%. The death benefit stays exempt regardless of premium, and pre-2021 ULIPs are unaffected. This guide covers the aggregation rule across multiple policies.

Section 10(10D) has told policyholders for decades that a life insurance maturity payout is tax-free, and ULIPs got swept along with that reputation for years. Since February 1, 2021, a separate rule applies specifically to ULIPs — a lower premium threshold than the one governing traditional plans, and a completely different tax treatment once that threshold is crossed. Most ULIP holders have never checked which side of that line their policy sits on.

The ₹2.5 Lakh Rule, and Why It's Different From Traditional Policies

For a Unit Linked Insurance Plan issued on or after February 1, 2021, the Section 10(10D) exemption on maturity proceeds is lost if the annual premium payable in any year of the policy term exceeds ₹2.5 lakh. This is a materially lower bar than the ₹5 lakh aggregate premium cap that applies to traditional, non-ULIP policies bought on or after April 1, 2023 — and the two rules were introduced through separate Budget amendments, two years apart, specifically because ULIPs carry a market-linked investment component that traditional endowment or money-back plans don't.

Our Section 10(10D) guide covers the traditional-policy side of this in full — this guide focuses on what happens once a ULIP specifically crosses its own, lower threshold, because the consequence isn't just "the payout becomes taxable." It changes which set of tax rules applies entirely.

Why Capital Gains, Not Slab-Rate Income

When a traditional policy loses its exemption, the gain is added to your income and taxed at your slab rate, same as salary or interest. A ULIP that loses its exemption is treated differently: the Finance Act 2021 brought ULIP units that fail the ₹2.5 lakh test within the definition of a capital asset for tax purposes, specifically as units of an equity-oriented fund under Section 112A. That reclassification matters because it caps the tax rate well below most people's slab rate, and it applies a holding-period test that has nothing to do with a traditional policy's exemption rules.

The Aggregation Trap Across Multiple ULIPs

The ₹2.5 lakh threshold isn't checked policy by policy in isolation if you hold more than one ULIP. If the combined annual premium across all ULIPs issued to you on or after February 1, 2021 exceeds ₹2.5 lakh in any year during any of their terms, the exemption is lost — and, per the CBDT's clarification on this provision, it is lost for maturity proceeds from all such ULIPs, not only the amount above the threshold or only the specific policy that tipped the total over. Buying two ULIPs at ₹1.5 lakh premium each in the same year, intending them as separate ₹2.5 lakh-eligible policies, defeats the purpose — the ₹3 lakh combined premium taxes both.

Once Breached, It Stays Breached

A ULIP that crosses the ₹2.5 lakh threshold in even a single year of its term loses the exemption for good — reducing the premium in a later year, or stopping additional top-ups, doesn't restore Section 10(10D) status retroactively for that policy's eventual maturity payout. This makes the decision to increase a ULIP's premium, or to add a top-up, worth checking against the cumulative ₹2.5 lakh figure before committing, not just against that single year's contribution.

What Stays Untouched

• The death benefit paid to a nominee remains fully tax-exempt under Section 10(10D) regardless of premium size — this cap applies only to maturity and surrender proceeds paid to a living policyholder.
• ULIPs issued before February 1, 2021 are not covered by this ₹2.5 lakh rule at all; they continue to be tested under the older premium-to-sum-assured ratio that applied at the time they were issued.
• A ULIP with premium safely under ₹2.5 lakh a year, and combined with any other post-Feb-2021 ULIPs still under that figure, keeps its full Section 10(10D) exemption exactly as before — most retail ULIP buyers with a single policy and a modest premium are unaffected by any of this.

If you're deciding whether a ULIP still makes sense as an investment vehicle given this cap, our ULIP vs mutual fund and term insurance comparison runs the actual cost and return comparison. And if a policy you're holding has already crossed the ₹2.5 lakh mark, treating the maturity payout like a mutual fund redemption for tax-planning purposes — tracking your ₹1.25 lakh LTCG exemption usage across both — is the more accurate way to plan than assuming the old "life insurance is tax-free" rule of thumb still applies.