Taxation of Equity oriented ULIPs

Tax Treatment: Tax-Free Under Section 10(10D)

Your ULIP surrender proceeds are completely exempt from tax for the following reasons:

1. Pre-2021 Policy Advantage

Since your ULIP was purchased in January 2014, it falls under the old tax regime for ULIPs issued before February 1, 2021. These policies are exempt from the ₹2.5 lakh annual premium cap introduced in Budget 2021.

2. Long-term Holding Period

You held the policy for over 10 years, which significantly exceeds the minimum 5-year lock-in period required for ULIPs. This long-term holding strengthens your eligibility for tax exemption.

Important Clarifications

No Capital Gains Tax Application

Unlike ULIPs purchased after February 1, 2021, your policy will not be treated as a capital asset subject to Long-Term Capital Gains (LTCG) tax. 

No Slab Rate Taxation

Since you surrendered after the 5-year lock-in period and the policy qualifies under Section 10(10D), the surrender value will not be added to your taxable income and taxed at slab rates.

You’re right to flag the 10% test — with ₹3.5 L premium on a ₹24 L sum assured, your premium is ~14.6%, so the Section 10(10D) exemption doesn’t apply for this 2014 ULIP.

• Since your annual premium (₹3.5 L) > 10% of sum assured (₹24 L), Section 10(10D) exemption does not apply.

• Your ULIP was issued in Jan 2014 and surrendered in Sep 2024 → falls under old law (before Budget 2025 changes).

• Therefore, the surrender proceeds are taxable as “Income from Other Sources” at your slab rate (on the income component = proceeds − total premiums). TDS u/s 194DA @5% would be deducted.

• Budget 2025 clarified that from 1 Apr 2025 (AY 2026-27 onwards), all taxable ULIPs (old or new) will be taxed as capital gains (equity-oriented ULIPs → LTCG @12.5% after ₹1.25 L exemption).

For your Sept 2024 surrender → Slab rate under IFOS.
For any future surrender after 1 Apr 2025 → LTCG rules apply.

• Section 10(10D) of the Income-Tax Act gives exemption for life insurance / ULIP maturity / surrender proceeds, but only if certain conditions are met (premium vs sum assured, etc.).

• From 1 Feb 2021, a new condition was introduced: if the aggregate annual premium (all ULIPs you own) in a year > ₹2.5 lakh, then ULIPs issued on or after that date may lose the 10(10D) exemption.

• Budget 2025 clarified that ULIPs not qualifying under Section 10(10D) (for whatever reason) will be treated as capital assets under Section 2(14)/Section 45(1B), so gains will be taxed as capital gains, rather than “income from other sources.”

Your Case & What Applies

Given your details:

• Policy start: Jan 2014 (so policy was issued well before the 1 Feb 2021 date).

• Premium: ₹3,50,000 per year.

• Sum Assured: ₹24,00,000.

Condition “premium not more than 10% of sum assured”:

• 10% of ₹24,00,000 = ₹2,40,000.

• Your premium ₹3,50,000 > ₹2,40,000 → so this condition is not met.

Thus, even pre-2021, because your premium exceeds 10% of sum assured, Section 10(10D) exemption would not apply for full exemption. This matches your understandings.

Since you surrendered in September 2024 (i.e. before Budget 2025’s effective changes take effect), the tax treatment should be under the rules as they existed for policies issued before Feb 2021, but with non-exempt status under 10(10D) (because of the broken 10% rule).

So your ULIP is a “non-exempt” ULIP under 10(10D).

Conclusion: How Your ULIP Surrender Will Be Taxed

Putting all that together, for your ULIP, surrendered in Sept 2024, these apply:

• Because your premium > 10% of sum assured, Section 10(10D) exemption is not available.

• So the surrender proceeds are taxable.

• The gain will be treated as Income from Other Sources (not as capital gains) because at that date the change classifying non-exempt ULIPs as capital assets isn’t yet effective.

• It will therefore be taxed at your marginal slab rate.

So not LTCG in your case (for policy surrendered in 2024 that breaks the 10% SA rule).

Thanks & Regards,
Damini

Who Must Be the “Life Assured”

The wording in 10(10D)(d) is very specific:

• It talks about the person on whose life the insurance policy has been taken.

• The test is whether the life insured suffers from the 80DDB illness.

• If that’s the case, then the premium ceiling becomes 15% of sum assured.

Your Case

• Your ULIP (Jan 2014) was on your own life, not your wife’s.

• Your wife unfortunately suffered from cancer (which is indeed a listed disease under Rule 11DD read with Sec 80DDB).

• However, she was not the “life assured” in this ULIP.

So, even though you surrendered the ULIP to meet her medical costs, the condition in 10(10D)(d) technically does not apply, because the insured life under the policy is yours — and you were not the one suffering from the 80DDB-specified ailment.

Practical Implication

• The 15% relaxation cannot be claimed in your case, as the benefit applies only when the life insured suffers from the disease.

• Since your annual premium (₹3.5 lakh) exceeded 10% of the sum assured (₹24 lakh → 10% = ₹2.4 lakh), the exemption under 10(10D) is denied.

• Hence, as discussed earlier, your surrender proceeds will be taxable.

  • Because surrender happened in Sept 2024 (before Budget 2025 changes take effect), the gains will be taxed as income from other sources at slab rate, not LTCG.

Summary:
Even though your surrender was due to your wife’s illness, Section 10(10D)(d)’s 15% rule does not apply, since she was not the life assured under the ULIP. The exemption is available only if the policy is issued on the life of the person suffering from the listed disease.

Thanks & Regards,
Damini