Published 9 May 2026
Sub-clause (10D) of section 10 of the Income-tax Act, 1961 as amended by the Finance Act, 2021 -- the Rs 2.5 lakh annual-premium ceiling beyond which Unit Linked Insurance Plan maturity proceeds become taxable as Capital Gain; the section 112A applicability post 23 July 2024 amendment; the policy-aggregation rule across multiple ULIPs of the same assessee; and the practitioner's strategy for HNIs holding pre-2021 grandfathered ULIPs
Taxpayer Brief
Until the Finance Act, 2021, Unit Linked Insurance Plans (ULIPs) were one of the most tax-attractive savings vehicles available to HNI investors -- a single high-premium policy providing market-linked returns plus the maturity-tax-free benefit of life insurance under sub-clause (10D) of section 10 of the Income-tax Act, 1961, subject only to the historical 10%-of-sum-assured premium ratio test. The Finance Act, 2021 disrupted this by inserting the rupees two lakh fifty thousand annual-premium ceiling -- ULIPs with annual premium exceeding rupees two lakh fifty thousand issued on or after 1 February 2021 LOST the section 10(10D) exemption. The maturity proceeds are taxed as capital gain. The Finance Act, 2024 further refined the position by treating such non-exempt ULIPs as equity-oriented mutual funds (where applicable) for capital-gain rate purposes. This article walks through the framework, the policy-aggregation rule, the worked computation, and the strategic implications.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Pre-1 February 2021 ULIP issued (grandfathered) | Low | Section 10(10D) continues; no Rs 2.5L cap |
Post-1 February 2021 ULIP with annual premium up to Rs 2.5L | Medium | Within cap; section 10(10D) exemption preserved |
Post-1 February 2021 ULIP with annual premium above Rs 2.5L | High | Taxable as Capital Gain; no Section 10(10D) exemption |
Multiple ULIPs of same assessee with aggregate premium above Rs 2.5L | Very High | Aggregation rule; per-policy testing |
1. The Statutory Framework
Provision | Effect |
|---|---|
Sub-clause (10D) of section 10 (pre-Finance-Act-2021 baseline) | Maturity proceeds of a life insurance policy (including ULIP) exempt subject to (a) 10% of sum-assured premium-ratio test; (b) policy issued before specified dates; (c) other conditions |
Proviso inserted by Finance Act, 2021 (effective 1 February 2021 onwards) | ULIP with annual premium exceeding Rs 2.5 lakh is OUTSIDE section 10(10D); maturity proceeds taxable |
Aggregation rule under the proviso | Where the assessee holds multiple ULIPs, the annual-premium aggregate across all such ULIPs is the test; policies with aggregate premium above Rs 2.5 lakh fail |
Pre-1 February 2021 ULIPs | Grandfathered -- continue to enjoy section 10(10D) exemption regardless of premium quantum |
Tax treatment of non-exempt ULIPs | Capital Gain on redemption -- treated under section 112A (12.5% post 23 July 2024) where ULIP qualifies as equity-oriented per the Finance Act, 2024 amendment |
The grandfathering is the practitioner's lever Pre-1 February 2021 ULIPs continue to qualify for full section 10(10D) exemption -- they are not subject to the rupees two lakh fifty thousand cap. HNIs who entered ULIPs at high premium levels (rupees five to ten lakh per year) before this date enjoy continued tax-free maturity. Post-1 February 2021, the same premium tier loses the exemption. The grandfathering creates a strong rationale to preserve and continue funding pre-2021 ULIPs rather than surrendering them in favour of newer instruments. |
2. The Aggregation Rule -- The Multi-ULIP Trap
The proviso inserted by Finance Act, 2021 specifically aggregates premium across ALL ULIPs of the same assessee. An HNI holding three separate ULIPs with annual premiums of (say) ₹1 lakh, ₹1 lakh, and ₹1 lakh -- aggregate ₹3 lakh -- exceeds the ₹2.5 lakh cap on the aggregate basis. ALL THREE policies fall outside section 10(10D). The structuring trap that the proviso closed -- splitting premium across multiple policies to stay below a per-policy cap -- has been firmly closed. The practitioner must aggregate.
Case Law Reference: The aggregation principle The aggregation provision is sufficiently new (Finance Act, 2021 effective 1 February 2021 onwards) that no Tribunal precedent has yet emerged on the precise mechanics. The likely interpretation, drawing from the structural anti-avoidance purpose of the proviso, is broad -- ALL ULIPs of the same assessee are aggregated, regardless of issue date (post-1-February-2021) or insurer. Pre-1-February-2021 grandfathered policies are typically treated as outside the aggregation pool (since they are not subject to the cap). Practitioners should treat any post-1-February-2021 ULIP as part of the aggregation set and run the test annually. [VERIFY: monitor BharatTax case-law database for emerging Tribunal decisions on multi-ULIP aggregation.] |
3. Worked Example -- HNI with Two ULIPs
Mr. Vishesh, age 50, holds two ULIPs -- (i) Tata AIA ULIP 2018 (issued before 1 February 2021) with annual premium ₹6 lakh; (ii) HDFC Life ULIP 2022 (issued after 1 February 2021) with annual premium ₹2 lakh. Both ULIPs are equity-oriented. Sum assured on each is approximately ₹60 lakh.
Element | Tata AIA 2018 | HDFC Life 2022 |
|---|---|---|
Issue Date | January 2018 (pre-1 Feb 2021) | March 2022 (post-1 Feb 2021) |
Annual Premium | Rs 6 lakh | Rs 2 lakh |
Aggregation under Finance Act, 2021 proviso | Pre-2021 grandfathered -- typically outside aggregation; full exemption preserved | Post-2021 -- subject to aggregation. Aggregate of post-2021 ULIPs is Rs 2 lakh; below the Rs 2.5 lakh cap. Section 10(10D) exemption preserved. |
10% sum-assured premium-ratio test | Premium Rs 6 lakh / Sum Assured Rs 60 lakh = 10% (boundary) | Premium Rs 2 lakh / Sum Assured Rs 60 lakh = 3.33% -- comfortably within |
Final exemption position | Tax-free maturity preserved | Tax-free maturity preserved (within Rs 2.5L cap) |
When Mr. Vishesh's position changes If Mr. Vishesh adds a third ULIP (say HDFC Life 2026) with annual premium Rs 1 lakh, the post-2021 aggregate becomes Rs 3 lakh -- breaching the Rs 2.5 lakh cap. ALL post-2021 ULIPs (HDFC Life 2022 + HDFC Life 2026) lose the section 10(10D) exemption. The Tata AIA 2018 grandfathered policy is unaffected. This illustrates the critical role of premium-aggregation discipline before adding new ULIPs to an existing HNI portfolio. |
4. The Tax Treatment of Non-Exempt ULIPs Post 23 July 2024
Where a ULIP fails section 10(10D) (post-2021 with aggregate premium above Rs 2.5 lakh), the maturity proceeds are taxed as Capital Gain. The Finance Act, 2024 amendment (effective 23 July 2024) clarified that such ULIPs, where the underlying investment is predominantly equity-oriented (typically defined as 65%+ in Indian equity), are taxed under section 112A at 12.5% on Long-Term Capital Gain above the rupees one lakh twenty-five thousand annual exemption (12 months minimum holding period). Where the ULIP is debt-oriented or hybrid, the Short-Term capital gain treatment applies at slab rate (post Finance Act, 2023 debt-fund regime).
5. Anticipatory Legal Analysis -- The Implementation Issues
Prospective Interpretation The Finance Act, 2024 treatment of non-exempt ULIPs as equity-oriented mutual fund equivalents raises specific implementation issues that have not yet reached the Tribunal. (i) ULIP allocation flexibility -- a ULIP that allows the holder to switch between equity-oriented and debt-oriented funds annually creates classification ambiguity; the likely interpretation is on the basis of allocation as on the date of redemption, but the Tribunal will need to clarify. (ii) Cost-of-acquisition for ULIP redemption -- whether the cumulative premium paid is the cost or only the net amount after deducting mortality charges; the structural argument favours the gross premium being the cost, with the mortality charge effectively a separate insurance-cost layer. (iii) Treatment of partial withdrawals during the policy term -- the proviso speaks of 'maturity proceeds' but ULIPs commonly permit partial withdrawal; the Tribunal will need to interpret whether each partial withdrawal is a separate redemption event with its own cost-basis allocation. Practitioners should preserve documentation of premium history, allocation snapshots, mortality-charge deductions, and partial withdrawal events pending judicial guidance. |
6. Strategic Implications
- Pre-1-February-2021 ULIPs are structurally valuable -- preserve and continue funding.
- Post-1-February-2021 ULIPs should be capped at aggregate Rs 2.5 lakh per year of total premium across all such policies.
- For HNIs needing additional savings beyond Rs 2.5 lakh in the post-2021 universe, redirect to direct equity-oriented mutual funds (no Rs 2.5 lakh cap; same 12.5% post-23-July-2024 LTCG rate; full liquidity / portability).
- ULIP combined-cost (premium loading + mortality charges) typically 3-5% of contributions in early years -- often makes a direct equity fund the more efficient long-term vehicle even where ULIPs preserve the section 10(10D) exemption.
- For pure life-insurance protection, prefer term insurance (where the maturity-proceeds question does not arise) over ULIPs.
7. Key Takeaways
- Sub-clause (10D) of section 10 proviso inserted by Finance Act, 2021 effective 1 February 2021 -- ULIP with annual premium above Rs 2.5 lakh loses the exemption.
- Aggregation rule -- Rs 2.5 lakh ceiling is on the AGGREGATE annual premium across all post-2021 ULIPs of the same assessee.
- Pre-1-February-2021 ULIPs are grandfathered -- continue to enjoy section 10(10D) exemption regardless of premium quantum.
- Non-exempt ULIPs post 23 July 2024 -- equity-oriented portion at section 112A 12.5% LTCG rate; debt-oriented at slab rate.
- Anticipatory analysis -- allocation classification, cost-of-acquisition definition, partial withdrawal treatment all await Tribunal clarification.
- Strategic positioning -- preserve grandfathered ULIPs; cap new-issue ULIPs at Rs 2.5 lakh aggregate; redirect surplus to direct equity-oriented mutual funds.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.