Unit-Linked Insurance Policies (ULIPs) are a popular investment-cum-insurance product that combine market-linked returns with life insurance coverage. The Direct Tax Code (DTC) 2025 has introduced significant changes to the taxation of ULIPs, particularly regarding the treatment of maturity and surrender proceeds as capital gains. Insurers have specific disclosure obligations to policyholders under this framework. This guide analyses the ULIP capital gains rules and the disclosure requirements for insurers.
The ULIP Capital Gains Framework
Section 67(5) — Capital Gains on ULIP Receipts
Section 67(5) provides that "Irrespective of anything contained in sub-section (1), if any profits or gains arises to a person from receipt of any amount, including a bonus, under a unit linked insurance policy to which the exemption specified at Schedule II (Table: Sl. No. 2) does not apply, then, such profits and gains shall be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of such person in the tax year in which such amount was received; and the income taxable shall be calculated in such manner, as may be prescribed."
Schedule II (Table: Sl. No. 2) — Exemption Conditions
The exemption under Schedule II applies subject to:
- Premium to sum assured ratio ≤ 15% for special policy and ≤ 10% for other policies
- Aggregate of premium for all such policies ≤ ₹2.5 lakh for ULIPs
- The conditions of aggregate premium of ₹2.5 lakh shall not apply to any sum received under a life insurance policy issued on or after 1st April 2025 by the International Financial Services Centre Insurance Office
Rule 49 — Computation of Capital Gains
Rule 49 of the Income-tax Rules, 2026 prescribes the computation methodology for capital gains on ULIP receipts.
Rule 49(1) provides that if a person receives any amount under a specified unit-linked insurance policy, including any bonus allocated on such policy, then the capital gains arising from receipt of such amount in situations referred in column B of the following Table shall be computed according to column C thereof:
First Receipt During the Tax Year
- Situations: Where the amount is received for the first time during the tax year
- Capital Gains: A — B
- A = The amount received for the first time, including the amount allocated by way of bonus on such policy
- B = The aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amounts referred to as 'A'
Subsequent Receipt During the Tax Year
- Situations: Where the amount is received during the tax year, at any time after the receipt of the amount as referred to in the first receipt situation
- Capital Gains: C — D
- C = The amount received during the tax year, at any time after the receipt of the amount as referred to above, including the amount allocated by way of bonus on such policy excluding the amount that has already been considered for calculation of taxable amount under this sub-rule during the earlier tax year or years
- D = The aggregate of the premium paid during the term of the specified unit linked insurance policy till the date of receipt of the amount referred to as 'C' as reduced by the premium that has already been considered for calculation of taxable amount under this sub-rule during the earlier tax year or years
Rule 49(2) provides that the capital gains as computed under sub-rule (1) shall be deemed to be the capital gains arising from the transfer of a unit of an equity-oriented fund set up under a scheme of an insurance company that includes unit linked insurance policies.
Key Definitions
Specified Unit Linked Insurance Policy
"Specified unit linked insurance policy" means any unit linked insurance policy referred to in Section 2(22)(c).
Unit Linked Insurance Policy
"Unit Linked Insurance Policy" means a unit linked life insurance policy:
- Which has components of both investment and insurance
- Is linked to a unit as defined in regulation 3(ee) of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019
Premium to Sum Assured Ratio
"Premium to sum assured ratio" shall mean the highest percentage of annual premium payable to the actual capital sum assured, during the term of the policy.
What Insurers Must Disclose to Policyholders
1. Tax Treatment on Maturity
Insurers must disclose to policyholders that:
- ULIP maturity proceeds that do not qualify for exemption under Schedule II are treated as capital gains
- The capital gains are deemed to arise from the transfer of a unit of an equity-oriented fund
- The gains are treated as short-term or long-term capital gains depending on the holding period
2. Computation Methodology
Insurers must explain the computation methodology under Rule 49:
- For first receipt: Capital Gains = A — B
- For subsequent receipts: Capital Gains = C — D
- The premium that has already been considered in earlier years is not considered again
3. Exemption Conditions
Insurers must disclose the conditions for exemption under Schedule II:
- Premium to sum assured ratio ≤ 15% for special policy and ≤ 10% for other policies
- Aggregate of premium for all ULIPs ≤ ₹2.5 lakh
- The exceptions for IFSC Insurance Office policies
4. Reporting Requirements
Insurers must:
- Issue TDS certificates for ULIP maturity/surrender proceeds
- Report the details of ULIP maturity/surrender in TDS returns
- Provide policyholders with the necessary information for tax return filing
Practical Compliance for Insurers
1. Identify Taxable ULIPs
- Identify ULIPs where the exemption under Schedule II does not apply
- Determine the sum received under the policy
- Determine the premium paid
2. Compute Capital Gains
- For first receipt: A — B
- For subsequent receipts: C — D
- Ensure correct identification of premium already considered
3. Issue Disclosures
- Provide policyholders with disclosure documents
- Explain the tax treatment of ULIP maturity/surrender
- Explain the computation methodology
4. Deduct TDS
- Deduct TDS on the taxable income
- Issue TDS certificates to policyholders
5. File TDS Returns
- File TDS returns with the prescribed details
- Ensure timely compliance
Consequences of Non-Compliance
For Insurers
- Penalty for failure to deduct TDS
- Penalty for incorrect reporting
- Regulatory action from IRDAI
For Policyholders
- Disallowance of exemption
- Tax on maturity/surrender proceeds
- Interest and penalty
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on ULIP capital gains compliance for insurers. Our direct tax experts help insurers understand the disclosure obligations, compute capital gains correctly, and navigate the regulatory framework. We assist in compliance, documentation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on ULIP capital gains or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex ULIP capital gains framework and disclosure obligations requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Disclosure Compliance: Assistance with policyholder disclosures
- Capital Gains Computation: Guidance on Rule 49 computation
- TDS Compliance: Assistance with TDS deduction and filing
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your ULIP taxation matters.