Taxation of ULIP-based Pension Plans

What Are the Tax Rules for ULIP Pension Plans?

The ULIP based pension plans are taxed differently during accumulation, maturity and annuity stages. Key rules include:

• ULIP Fund Growth Taxation: There is no separate taxation of ULIP fund growth during the accumulation stage. The ULIP fund will be taxed based on receipt, subject to the ULIP meeting the exemption criterion or coming under capital gains.
• Maturity Proceeds: Eligible ULIP plans maturity proceeds can be exempted from total income provided the requirements of Schedule II are met. In the event that the exemption is not available, the provisions of capital gains might be used.
• Annuity Taxation: The corpus used to purchase an annuity plan provides a regular pension income, which is normally subject to taxation under the applicable income tax category of the person.
• High-Value Premiums: In the case of relevant ULIPs issued on or after 1 February 2021, there is an aggregate premium condition of ₹2.50 lakh, subject to the requirements provided by Schedule II.

Stages of ULIP Taxation

Taxation of ULIP-based pension schemes varies across the contribution, accumulation, maturity, and withdrawal phases. The provisions of the Income-tax Act, 2025, such as the premium limits, the premium-to-sum-assured conditions, and the exemption provisions, are applicable to each stage.

1. Tax Benefits on ULIP Premiums under Section 123

   Under section 123 with Schedule XV, eligible premiums under life insurance may qualify for a deduction of ₹1.50 lakh, as per the stipulated terms. The deduction is available for the premiums on specified life insurance and is subject to the relevant tax regime and other statutory obligations.

2. Tax on ULIP Maturity Amount under Schedule II (2)

   The value received on eligible life insurance policies, such as specified ULIPs, may not be part of total income where the conditions under Schedule II are satisfied. The exemption for ULIPs issued on or after 1 February 2021 is subject to the ₹2.50 lakh aggregate premium condition and the applicable premium-to-sum-assured requirements.

3. Tax Treatment of ULIP Death Benefits

   Under the Income-tax Act, 2025, the ULIP death benefits are considered differently compared to maturity proceeds. The exemption provisions under premium limits and premium to sum assured are not applicable in the same manner to amounts received on the death of the insured. Thus, eligible death benefits may be exempted as per the relevant provisions.

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4. For ULIPs Purchased Before April 1, 2012

   The standard exemption premium to sum-assured condition is 20% in the case of ULIPs issued between 1 April 2003 and 31 March 2012. Policy proceeds may be qualified to receive the tax exemption as per the prescribed condition. The old pension plans are therefore handled depending on the date they were issued and the conditions which existed at that period.

5. For ULIPs Purchased On or After April 1, 2012

   The premium to sum assured ratio of ULIPs issued between 1 April 2012 and 31 March 2013 is usually 10%. In the case of policies issued between 1 April 2013 and 31 January 2021, it is normally 15% on specified special policies and 10% on other policies. Therefore, the amount of premium to be paid every year should not be more than 10% of the amount assured to meet the mandatory requirement, depending on the provisions that are required of the policy.

6. Maturity Benefits for ULIPs Purchased Before February 1, 2021

   The ₹2.50 lakh aggregate premium requirement is applicable to specific ULIPs that are issued after 1 February 2021. ULIPs issued before this are subject to exemption provisions that are applicable to their issue dates. The tax treatment on these older policies remains subject to the conditions of the issue date of such policy, including the required premium-to-sum-assured ratio.

7. Taxation of High-Premium ULIPs

   In case a ULIP fails to meet the exemption criteria under Schedule II (2), the policy may be considered as a capital asset and the amount obtained may be liable to tax as a capital gain. This is used in particular in ULIPs where the Schedule II exemption does not exist.

8. Tax Treatment of ULIP Withdrawals and Surrender

   The lock-in period of ULIPs is usually five years. Premature withdrawal or surrender may affect the tax benefits of the policy and may have tax consequences under certain circumstances. Rule 49 provides the calculation of the capital gain on amounts received in respect of specified ULIPs subject to taxation under the capital-gains provisions.

How Taxable ULIP Gains Are Calculated

The capital gain on receipts from a specified ULIP is calculated according to the method prescribed under Rule 49 for the purposes of Section 67(5). Capital gain is calculated by the difference between the amount received, including any bonus, and the cumulative premiums paid to date when an amount is received during a tax year. For future receipts, the amount received and premiums paid are calculated after excluding amounts and premiums already considered for taxation in previous years.

Under Rule 49, the calculated capital gain is treated as the gain from transferring a unit of an equity fund under an insurance company’s scheme, including ULIPs. The rule is limited to a specified unit-linked insurance policy as the term is used in Section 2(22)(c).

Tax Benefits on Pension Plans in India

ULIP based pension schemes have the advantage of offering tax deductions on premium payments and maturity benefits as per the provisions laid down in the Income-tax Act, 2025. The important ULIP provisions are given below.

Note: Additional deduction of ₹50,000 under Section 124(3) and withdrawal of NPS corpus are not included since they relate to notified pension schemes like NPS and not ULIP pension schemes. Section 124(3) provides an additional deduction with respect to contributions made to a Central Government-notified pension scheme.

Premium-to-Sum-Assured Conditions for ULIPs

The Income-tax Act, 2025 specifies various premium-to-sum-assured terms based on the time of insurance policy issue. In the case of ULIPs the applicable conditions are:

Key Factors Affecting ULIP Taxation

The taxation of a ULIP based pension plan is dependent on several factors:

• Policy issue date: The exemption conditions depend on the date of issue of the ULIP.
• Aggregate premium: In the case of applicable ULIPs, the 2.50 lakh aggregate premium requirement must be tested as required by Schedule II, which also requires the treatment of multiple applicable policies.
• Sum assured: The ratio of premium to sum assured should meet the required limit.
• Policy lock-in: ULIPs generally have a five-year lock-in period.
• Type of receipt: Maturity proceeds, death benefits, withdrawals and other receipts can have different tax treatment.
• Exemption eligibility: The ULIP can come under capital-gains provisions in case of not satisfying Schedule II conditions.
• Multiple policies: The aggregate premium between suitable ULIPs is applicable when the ₹2.50 lakh threshold is tested.

ULIP Tax Benefits: Old vs. New Tax Regime (FY 2026-27)

ULIPs are taxed differently in the new and old tax regimes. According to the old regime, ULIP premiums are eligible for a deduction of up to ₹1.50 lakh under Section 123 (earlier Section 80C), under the required conditions. The new concessional tax regime under Section 202 does not allow the Section 123 deduction. Eligible ULIP maturity proceeds may be exempt under Schedule II, subject to certain conditions, including the ₹2.50 lakh aggregate annual premium limit.

Common Tax Filing Mistakes for ULIP Pension Plans

In the event of any misreporting of the ULIP-based pension income, increased taxation or loss of tax benefits may be incurred. The most common errors that taxpayers should consider are:

• Ignoring annuity taxation: An annuity payment is usually taxable, and it must be reported in accordance with the relevant taxation laws.
• Overlooking premium limits: In the case of relevant ULIPs issued on or after 1 February 2021, the ₹2.50 lakh aggregate annual premium limit has a potential effect on the right to claim maturity tax exemption.
• Misreporting ULIP receipts: ULIP receipts of maturity, withdrawal, and other taxable receipts should be reported on the basis of the respective tax treatment and not on the basis that all receipts are not taxable.
• Claiming ineligible deductions: Only eligible deductions can be made in Section 123 of the Income Tax Act 2025 on eligible premiums and payments that satisfy the requirements of Schedule XV.
• Ignoring the lock-in period: ULIPs usually have a lock-in period of five years. Surrendering or withdrawing early may affect tax benefits, and it might increase tax implications.

Key Takeaways

ULIP-based Pension Schemes Tax Structure is governed by the Income-tax Act, 2025. Section 123 allows deduction on the eligible premium amount, whereas Schedule II allows exclusion of the qualifying amount of proceeds. Post 2021 ULIPs have an aggregate premium limit of ₹2.50 lakh.