Aggregated premiums, policy issue dates and payout type determine whether high-premium insurance proceeds remain exempt, with ULIPs and non-ULIP policies taxed under different rules when relief is lost.
ULIP holders and buyers of high-premium life insurance plans need to look beyond the headline tax break and check whether their policies still meet the conditions for exemption. The key test sits in Schedule II of the Income-tax Act, 2025, which allows sums received under a life insurance policy, including bonus, to stay out of total income only if the prescribed rules are satisfied. That means the premium-to-sum-assured ratio, the policy issue date and the nature of the payout all matter, not just the fact that the product is covered by insurance. According to Ebizfiling and other tax guides, the crucial point for many investors is that the exemption can fail once aggregate premiums cross the specified threshold.
For unit-linked insurance plans, the premium cap depends on when the policy was issued. Ebizfiling notes that for ULIPs issued from 1 February 2021 to 31 March 2023, the combined premium across all such policies in a tax year should not exceed ₹2.5 lakh, while for policies issued on or after 1 April 2023 the total must be less than ₹2.5 lakh. The practical implication is that the test is not applied policy by policy alone; taxpayers with more than one ULIP must add the premiums together before deciding whether the exemption survives. Tax-focused summaries of Schedule II from independent legal and tax websites make the same point, underlining that the law is concerned with aggregation across policies rather than isolated contracts.
Where a specified ULIP fails the exemption test, the tax treatment changes again. Ebizfiling says taxable ULIP proceeds are brought into charge under Section 67(5), with the gain computed under Rule 49 of the Income-tax Rules, 2026. In practice, that means the taxable amount is worked out by comparing the receipt, including any bonus, with the aggregate premiums already paid, while later receipts are calculated separately to avoid double counting. That is a different framework from the one applied to ordinary life insurance policies, and it can affect how investors report the proceeds on their return.
The position for high-premium non-ULIP policies is similar in structure but different in detail. For specified life insurance policies issued on or after 1 April 2023, Ebizfiling says the aggregate premium generally should not exceed ₹5 lakh in any tax year during the policy term if the policyholder wants to preserve the exemption. If the sum assured ratio or the premium threshold is breached, the maturity proceeds may become taxable. According to the same tax guides, this is governed by Section 92(2)(l) rather than the ULIP rules, which means the income is typically assessed under the head “income from other sources” rather than as capital gains.
That distinction matters because the tax outcome can look similar on the surface but differ sharply in law. ULIPs and non-ULIP life insurance policies are both examined under Schedule II for exemption, yet the statute routes taxable proceeds through different charging provisions once the exemption is lost. Ebizfiling’s comparison shows that ULIP gains are treated as capital gains, while taxable non-ULIP policy proceeds are generally taxed as income from other sources. The difference becomes especially important for policyholders who may assume all insurance maturity amounts are treated the same way, when in fact the policy type determines the tax head and the mechanics of calculation.
Death benefits are treated more favourably than maturity or surrender proceeds, but they still need to be checked against the statutory conditions. Ebizfiling says amounts paid on death are generally protected from the premium-limit restrictions under Schedule II, although the policy type and any express exclusions still have to be reviewed. By contrast, maturity and surrender values are exempt only when the relevant conditions are satisfied. Where the proceeds are taxable, Section 393(1), Table Sl. No. 8(i), provides for 2% TDS on the income component once the payment threshold of ₹1 lakh is crossed, but that deduction is not the final tax bill. Taxpayers are expected to verify the figures in Form 168, the annual tax statement, before filing their return.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
