ULIP Capital Gains Tax 2026: New Rules & Rates Explained

If your ULIP's annual premium crosses ₹2.5 lakh (for policies bought on or after 1 February 2021), the gain on maturity is taxed as capital gains at 12.5% above a ₹1.25 lakh exemption — not tax-free, like a lot of people still assume. Here's exactly how that number is worked out, and the one mix-up that ends up costing some policyholders a lot more than they expect.

This article is written under the Income-tax Act, 1961. You're filing your return for FY 2025-26 (AY 2026-27) right now, and this year's return runs entirely on 1961 Act numbering — the Income-tax Act, 2025 only kicks in from Tax Year 2026-27 onward. Every section quoted below has been checked against the Income Tax Department's official 1961-to-2025 mapping utility and current CBDT material.

Table of Contents

1. What is ULIP Capital Gains Tax?

2. Who Does This Apply To?

3. ULIP Tax Rates You'll Actually Pay in 2026

4. Examples With Real Numbers

5. How to Calculate the Tax on Your Own ULIP

6. What If Something Goes Wrong?

7. Documents You'll Need

8. Penalties to Watch Out For

9. FAQ

What is ULIP Capital Gains Tax?

A ULIP (Unit Linked Insurance Plan) bundles life cover with a market-linked investment. So is ULIP taxable at all? Usually not — the payout is exempt under Section 10(10D) of the Income-tax Act, 1961. But the Finance Act 2021 added a carve-out to the ULIP taxation rules: once that exemption is lost for a specific reason, Section 45(1B) treats the profit as a capital gain, worked out using CBDT Rule 8AD (notified 18 January 2022, see incometaxindia.gov.in). Most articles just say "taxed like equity mutual funds" and stop there, without naming the actual provision. And the same Rule 8AD math applies whether you're at maturity or paying ULIP surrender tax on an early exit — the trigger is the payout itself, not what you call it.

Who Does This Apply To?

One thing worth flagging: hold more than one ULIP issued after 1 February 2021, and the ₹2.5 lakh cap is added up across all of them, not checked policy by policy.

ULIP Tax Rates You'll Actually Pay in 2026

Here's the part most guides skip — actual figures, not just descriptions of them:

• Equity-oriented ULIP (at least 65% of proceeds in listed domestic equity, or 90% if you're invested through equity mutual funds): taxed under Section 112A. The ULIP LTCG tax rate (held over 12 months) is 12.5% on gains above ₹1.25 lakh a year, effective for sales from 23 July 2024 [Source: incometaxindia.gov.in, PIB]. STCG (held 12 months or less) is a flat 20% under Section 111A.

• Debt-oriented or non-equity ULIP (fails the 65%/90% test): falls back on general Section 112. This is what most people mean when they ask about ULIP maturity tax on a debt-heavy plan — gains held over 24 months count as LTCG at 12.5%, no indexation, and anything shorter is short-term at your slab rate.

• Add 4% Health & Education Cess on top of every number above — easy to forget, and it does add up on a big payout.

• TDS under Section 194DA: your insurer deducts 2% (down from 5%, effective 1 October 2024) on just the income part of the payout — proceeds minus premiums — whenever 10(10D) doesn't apply and the payout crosses ₹1 lakh in a year.

• Death benefit: always fully exempt under Section 10(10D)(d), no matter the premium or the sum-assured ratio.

Here's the mix-up that trips up almost every reader, and honestly, every insurer page I checked blurs it too. Section 10(10D) can fail for two different reasons, and the consequences are worlds apart:

1. The premium-threshold rule (ULIP-specific, Finance Act 2021): aggregate annual premium goes over ₹2.5 lakh on a policy issued on or after 1 February 2021. This is the only trigger for Section 45(1B) — the statute says capital-gains treatment applies "on account of the applicability of the fourth and fifth proviso" to Section 10(10D).

2. The sum-assured ratio rule (general, applies to every life policy): premium exceeds 10% (20% on older policies) of the sum assured. If this is why 10(10D) fails, Section 45(1B) doesn't apply at all — the whole payout is taxed as ordinary income at slab rate, not just the gain at 12.5%.

Get the reason wrong, and you could underpay tax by a wide margin. Example 2 below shows exactly how big that gap can be.

Examples With Real Numbers

Example 1 — Ramesh (the common case)

Ramesh bought an equity-oriented ULIP on 1 March 2021, paying ₹4,00,000 a year for 5 years (total premium ₹20,00,000). It matured on 1 March 2026, paying out ₹32,00,000.

• His annual premium (₹4 lakh) is above ₹2.5 lakh, so Section 10(10D) fails through the ULIP premium rule → Section 45(1B) applies.

• Capital gain, using Rule 8AD's formula (C − D) = ₹32,00,000 − ₹20,00,000 = ₹12,00,000

• Held for 60 months, and equity-oriented, so this is LTCG under Section 112A.

• Taxable gain = ₹12,00,000 − ₹1,25,000 exemption = ₹10,75,000

• Tax = ₹10,75,000 × 12.5% = ₹1,34,375; plus 4% cess = ₹5,375 → Total ₹1,39,750

• TDS already deducted under Section 194DA (2% of ₹12,00,000) = ₹24,000, which he can adjust against this at filing time.

• Net tax payable after the TDS credit: ₹1,15,750

Example 2 — Priya (the edge case almost every guide misses)

Priya bought her ULIP on 10 December 2015 — well before the 2021 cutoff, so the ₹2.5 lakh rule never even enters the picture for her. Sum assured: ₹8,00,000. Annual premium: ₹1,20,000 for 10 years (total ₹12,00,000). It matured on 10 December 2025, paying out ₹22,00,000.

Her premium works out to 15% of the sum assured — over the 10% cap that applies to policies issued after 1 April 2012. So Section 10(10D) fails, but through the sum-assured ratio, not the ULIP proviso. That means Section 45(1B) never comes into play, and there's no capital-gains treatment at all. The entire ₹22,00,000 gets taxed as ordinary income, at her regular slab rate.

• Priya's slab rate: 30%

• Tax = ₹22,00,000 × 30% = ₹6,60,000; plus 4% cess = ₹26,400 → Total ₹6,86,400

Now compare that to what she'd have owed if this had qualified for capital-gains treatment like Ramesh's policy did: gain of ₹10,00,000, minus the ₹1.25 lakh exemption, taxed at 12.5% plus cess, comes to ₹1,13,750. Same-looking "high premium ULIP" on paper, but a ₹5,72,650 difference in tax — purely because of which test it failed. The insurer's TDS of just ₹20,000 (2% on the ₹10 lakh gain component) won't come close to covering her real bill, so she'll owe the balance when she files.

How to Calculate the Tax on Your Own ULIP

1. Check your issue date first, to confirm whether the ₹2.5 lakh rule even applies (it only kicks in for policies from 1 February 2021 onward).

2. Check your premium against the sum-assured ratio (10% or 20%, depending on when you bought it) — this tells you which rule you've actually broken.

3. ULIP premium rule failed: capital gain = proceeds received minus aggregate premiums paid to date (Rule 8AD).

4. Sum-assured ratio failed instead: the whole payout counts as taxable income, not just the gain.

5. Check your fund's equity allocation (the 65%/90% test) to know whether Section 112A or Section 112 governs your case.

6. Apply the ₹1.25 lakh exemption (only under 112A), then the rate, then 4% cess.

Toolisky's ULIP Capital Gains Tax Calculator does all of this for you — plug in your issue date, premiums, and proceeds, and it flags your exemption status, holding period, and tax due in one shot.

What If Something Goes Wrong?

You filed ITR-1 by mistake. Even a small capital gain rules out ITR-1. You'll get a defective-return notice under Section 139(9) — refile on ITR-2 (or ITR-3 with business income) within the given window, or the return counts as never filed.

Your AIS doesn't match what the insurer reported. Insurers report ULIP payouts to the tax department directly. Pull your maturity statement from the insurer, check it against your AIS on the e-filing portal, and raise a feedback request before filing if the numbers don't line up.

You missed the 31 July 2026 deadline. No extension has been announced for AY 2026-27 ITR-1/ITR-2 filers. You can still file a belated return under Section 139(4) by 31 December 2026, but you'll owe the Section 234F late fee plus 1% monthly interest under Section 234A.

Documents You'll Need

Penalties to Watch Out For

Under-reporting your gains costs 50% to 200% of the tax evaded, under Section 270A. Miss an advance-tax instalment once your liability crosses ₹10,000, and interest kicks in under Sections 234B and 234C at 1% a month. File late, past 31 July 2026, and you're looking at ₹5,000 under Section 234F if income is above ₹5 lakh (₹1,000 if not), plus 1% monthly interest under Section 234A — and you permanently lose the right to carry forward any capital loss from that year.

FAQ

Is ULIP maturity amount always taxable?

No. ULIPs bought before 1 February 2021 stay exempt under Section 10(10D) as long as the premium stays within 10-20% of the sum assured. Newer ULIPs stay exempt too, as long as the annual premium is ₹2.5 lakh or less.

Is this the same as mutual fund tax?

Only if your ULIP is equity-oriented and fails the premium test — Section 112A applies, same as equity mutual funds. A debt-oriented ULIP falls under Section 112 instead, and a sum-assured-ratio failure isn't capital gains at all — it's full income at your slab rate.

What's the ULIP capital gains tax rate for AY 2026-27?

12.5% on LTCG above ₹1.25 lakh for equity-oriented ULIPs (Section 112A), 20% STCG (Section 111A), and 12.5% no-indexation LTCG after 24 months for debt-oriented ULIPs under Section 112.

Does the ₹2.5 lakh rule apply to a ULIP I bought in 2019?

No. It applies only to ULIPs issued on or after 1 February 2021. A 2019 policy runs under the older rule — exempt as long as premium stays within 10% of the sum assured.

I already filed my ITR without reporting these gains — what now?

File a revised return under Section 139(5) before 31 March 2027 for AY 2026-27. If you've already got a defective-return notice, respond within its window rather than waiting.

Is switching between funds inside a ULIP taxable?

No. Fund-switching has never been a taxable event, even on a high-premium policy. Tax only shows up when you actually receive money — at maturity, surrender, withdrawal, or as a death benefit.

Which ITR form do I use to report this?

ITR-2, reported in Schedule CG, for individuals and HUFs without business income. Use ITR-3 if you also have business or professional income. ITR-1 is off the table once any capital gain applies.

Is the death benefit from a ULIP taxable?

No, never. Death benefits stay fully exempt under Section 10(10D)(d), regardless of premium, sum-assured ratio, or issue date.

How is TDS on ULIP maturity actually worked out?

The insurer deducts 2% (since 1 October 2024) only on the income part — proceeds minus premiums paid — and only when 10(10D) doesn't apply and the payout is over ₹1 lakh. Your actual liability at filing time can be higher or lower than that TDS figure.

My ULIP sits mostly in debt funds — does the 12.5% equity rate still apply?

Only if it clears the 65% direct-equity threshold (or 90% through equity mutual funds). If not, Section 112 applies instead: 12.5% LTCG after 24 months, no indexation, or slab-rate tax below that.

Can I claim indexation on these gains?

No. Since the Finance (No. 2) Act 2024, effective 23 July 2024, LTCG on both equity- and debt-oriented ULIPs is worked out without indexation.

Do NRIs pay the same tax on ULIP gains?

Yes, same rates, but TDS runs under Section 195 instead of 194DA for NRI payouts, usually at a steeper upfront rate before DTAA relief and Form 67 credit apply.

Pull out your ULIP's issue date, premium history, and proceeds statement today — the ITR deadline is three days away, so this isn't one to leave for the weekend. Run the exact numbers through Toolisky's ULIP Capital Gains Tax Calculator, and if you're also holding equity mutual funds, Toolisky's guide to LTCG on mutual funds shows how the same ₹1.25 lakh exemption gets shared across both. File your return at the income tax e-filing portal.

For educational purposes only. Verify all figures at official sources before acting. Toolisky is not affiliated with any government body. Consult a qualified CA or legal professional before making compliance decisions. See toolisky.com/accuracy-and-limitations.