Now, maturity proceeds from high-value Ulips are taxed as capital gains under the current rules. So, if you purchase a Ulip with an annual premium of at least ₹2.5 lakh, the maturity proceeds are now taxed as capital gains. In other words, your gains will be taxed at 12.5% after the first ₹1.25 lakh. For lower-ticket Ulips, the maturity proceeds will remain tax-exempt as long as the sum assured is at least 10 times the annual premium. Death proceeds—or money the nominees get—remain tax-free regardless of the ticket size.
While high-value Ulips have come under the tax radar, they continue to enjoy certain advantages over mutual funds purely from a taxation standpoint. First, the capital gains tax is a flat 12.5% and does not vary even for debt exposure within a Ulip. Second, you do not incur capital gains tax when switching between fund options within the same Ulip.
This also explains why Ulips are increasingly adopting a mutual fund-like approach, launching new fund offers and mirroring the categorization seen in mutual funds. But before you choose a Ulip for its tax advantage and fund switching flexibility, understand the product limitations and why a simpler route of mutual funds may still offer a more hygienic approach to investing.
The tax advantage
Ulip is a bundled investment product that comes with a wrapper of life insurance. Unlike traditional products, the costs are transparent. Upfront costs like policy allocation charges are deducted from the premium that you pay, and the rest is invested in the funds of your choice. The remaining costs, such as mortality costs and fund management costs, are then deducted from the invested corpus.
Earlier, Ulips usually offered three broad categories of aggressive, moderate, and conservative options, but now, Ulips offer mutual funds like new fund offers (NFOs). “The number of fund options has more than doubled, in line with the growth in mutual fund schemes. To offer investors a variety for different market situations, NFOs are being launched in Ulips,” said Naveen Goel, co-founder and chief executive of insurance aggregator PolicyX.com.
What works squarely in favour of Ulips is the tax-free switching between funds and the associated tax advantages. So, if you wish to move from an aggressive to a conservative strategy, or even from large-cap to small-cap exposure, you can do so within the same Ulip without triggering capital gains tax.
In contrast, a mutual fund investor would need to redeem units, incur capital gains tax, depending on whether the fund is equity or debt and the holding period, and then reinvest in another fund. Such tax leakages can meaningfully hurt long-term returns.
It’s also important to note that high-value Ulip investors incur only one type of capital gains tax, at 12.5%, after the first ₹1.25 lakh (across all capital assets) is tax-exempt. In other words, while a debt fund investor in mutual funds will end up paying tax at the slab rate (for purchases made post April 2023), Ulip investors with exposure only to debt funds will continue to pay tax at 12.5%.
₹5 lakh and the policies are issued after April 2023.” title=”It’s important to note that for other non-Ulips insurance cum investment products, the maturity proceeds are taxable at slab rates if the annual premium exceeds ₹5 lakh and the policies are issued after April 2023.”>View Full Image
“Ulips are long-term investment products, hence the distinction between short-term and long-term tax won’t apply. Even though Ulips have debt and equity investments both, the Finance Bill 2025 terms it as a capital asset, unlike debt mutual funds, and taxes the same at 12.5% for high-premium Ulips for the maturity benefit handed over from 1 April 2026,” said Raju Shah, partner at RCSPH & Associates.
It’s important to note that for other non-Ulips insurance cum investment products, the maturity proceeds are taxable at slab rates if the annual premium exceeds ₹5 lakh and the policies are issued after April 2023.
“Individuals in the maximum tax slab are happy even with high-premium Ulips being taxed as they can switch between fund options as many times as they want without attracting capital gains tax until final withdrawal or maturity,” said Ajay Sehgal, managing director at Allegiance Financial.
While switching between funds will require an understanding of the markets and investment goals, the flexibility is clearly a selling point. “Individuals who are looking for long-term investment are willing to take advantage of low fund management charges and free fund switches of such plans to achieve their long-term objective,” said Satishwar B., managing director and CEO of Bandhan Life Insurance Ltd.
But costs bite
Ulips come with tax advantages, but from a structural standpoint, the product has limitations.
Devang Shah, 43, whose ₹7 lakh Ulip investment grew by only ₹4.4 lakh since 2017, experienced it first-hand. His investment in mutual funds invested in a similar theme had returned far more, and that’s when he realized how early upfront costs can eat into the returns.
“The portion of invested money is higher in mutual funds as under Ulips one loses 10-15% in the first year itself, which excludes mortality premium. Additionally, 4-5% aren’t invested in the subsequent year due to charges,” said Shilpa Arora, chief operating officer at Insurance Samadhan.
This, according to Deepali Sen, certified financial planner and founder of Srujan Financial Services Llp, means that Ulips lose out on the most productive years due to expenses. “The compounding gains are the highest in the first five years,” she explained.
It should be noted that while Ulips have fund management charges in the range of 0.5-1.25%, there are many other charges applicable, including premium allocation, policy administration, mortality/risk charge, miscellaneouscharges, and even switching charges beyond the free switches annually, which can meaningfully impact returns. Make sure you take note of these costs as well.
But cost is not the only setback; Ulips also come with a tiny sliver of insurance that doesn’t really cater to any real insurance need. Shah’s life insurance cover was hardly ₹10 lakh, which isn’t sufficient to cover his housing loan and the family’s overall income-replacement needs in case of an untoward event.
Strict lock-ins
By itself, a long-term product lock-in may not hurt, but when accompanied by unscrupulous sales tactics, it may feel like a trap. “One can’t surrender and withdraw Ulip during the initial five years. The elderly are sold Ulip claiming it is a fixed deposit, but during medical emergencies, they can’t withdraw,” said Arora.
And this is not a one-off. According to Tarun Bahri, co-founder and CEO of Policy Exchange, a premium funding firm, many investors do not have the funds to continue paying the premium. “About 40% of investors approaching us want to exit Ulip, while 20% take a loan against the policy to keep funding premium,” he said.
This fact has also been captured by the Reserve Bank of India’s Financial Stability Report. According to the December 2025 report, a significant 37% of life insurance payouts in 2024-25 came from early exits, surrenders, and withdrawals rather than from policy maturities (35%) or death claims (7.5%), indicating dissatisfaction.
The way out
Despite the obvious advantage of Ulips, financial planners recommend keeping your needs separate. Pure term life insurance and separate investments are far more valuable than the tax-outgo claims of financial planners.
“It is better to keep investment and insurance separate due to both the expense ratio and the inertia to move out despite a lack of performance. Under Ulip, one can’t move out of one fund management style to choose another. One shouldn’t make taxation the focal point for objective investment allocation, but performance and the ability to move out if need be,” said Vivek Rege, founder and CEO of V R Wealth Advisors.
