Budget 2026: ₹10 lakh premium limit for taxing gains from ULIPs like equity, experts suggest

Until a few years ago, the Unit Linked Insurance Plan (ULIP) was an EEE (exempt, exempt, exempt) category tax-saving instrument. Finance Act 2021 changed this, making maturity proceeds taxable as equity mutual funds if the premium is over ₹2.5 lakh. However, no tax applies if a nominee receives the amount after the subscriber's demise.

"In order to rationalise taxation of ULIP, it is proposed to allow tax exemption for maturity proceed of the ULIP having annual premium up to ₹2.5 lakh. However, the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of ₹2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021," the Finance Minister said in Budget speech 2021.

"Further, in order to provide parity, the nonexempt ULIP shall be provided same concessional capital gains taxation regime as available to the mutual fund," she added.

As Budget 2026 approaches, experts at the Bombay Chambers of Commerce and Industry (BCCI) have suggested raising the taxable premium threshold to up to ₹10 lakh.

"The limit of aggregate premium of ₹2.5 lakh may be too low to determine customers as HNI. Considering this and the disruption it may create, the Chamber recommends enhancing the limit at ₹10 lakh of aggregate premium," the experts said in their pre-budget memorandum.

The BCCI experts further said that the new taxation regime for ULIPs, while bringing in some additional tax revenues, may hinder other benefits that were being provided until now. Consequently, the net benefit may be negative, because of the following reasons:

1. ULIP and equity mutual funds are products with very different characteristics.

While ULIP is a long-term product with a minimum lock-in period of 5 years, equity mutual funds have no such lock-in period, except for ELSS funds, which have a lock-in period of 3 years.

ULIP has a built-in life cover equal to 10 times of the annual premium (for age of policyholder < 45 years). Equity funds don’t provide any risk cover by way of insurance and are purely investment products.

2. ULIP is a long-term goal-based financial solution with dual benefits of protection and investment.

The EEE category tax implications for the taxpayers made ULIP a very attractive product for individuals, who still are not comfortable to buy term insurance plans for their protection needs. The new regime will make ULIP less attractive and could further deteriorate the insurance penetration in India, currently at 4.253% of GDP (2020 and 2021) against global average of 7.4%.

3. Due to long-term nature of ULIPs, it is feasible to invest the funds under ULIP in long-tenure debt instruments e.g., bonds issued by infrastructure companies. With the new regime, ULIP would lose favor as long-term investment products and make it less feasible to fund the infrastructure-related projects.

All eyes are now on Budget 2026 to see whether or nor the FM revises ULIP taxation rules.