For life insurance policies issued between April 1, 2003 and March 31, 2012, tax exemption is available if the premium paid for any premium year does not exceed 20% of the sum assured. According to financial expert Balwant Jain, this limit includes any top-up premiums paid during the policy term. The exemption applies to policies that satisfy the conditions under Section 10(10D) prevailing at the time of issuance. Recent developments show that Section 80C tax benefits allow deductions up to ₹1.5 lakh from taxable income per year, while Section 10(10D) tax benefits are available for investments up to ₹2.5 lakh annually for policies purchased after February 1, 2021. ULIPs cover Life insurance with benefits of equity investments and have attracted attention not only because they help save tax but also perform well to give decent returns in the long-term.
For the policy in question, with an annual premium of ₹18,000 and sum assured of ₹1,00,000, the maximum allowable top-up premium is ₹2,000 annually. As reported by Jain, once the top-up premium exceeds this threshold by even a single rupee, the entire policy loses its tax exemption and becomes taxable. The policy permits top-up premiums that are invested under the same policy number and reflected in the same fund account. Recent plans like the ICICI Pru Smart Goal Assure Plan offer flexible premium payment options including annual, half-yearly, and monthly modes, with ₹1,00,000 per year as the maximum allowable top-up premium subject to Board Approved Underwriting Policy (BAUP).
The difference between premiums paid and money received is taxed as capital gains, with rates varying based on the investment period and underlying fund composition. Profits attributable to premiums paid within two years are treated as short-term capital gains and taxed at the applicable slab rate. For premiums paid beyond two years, the profits are classified as long-term capital gains and taxed at a flat rate of 12.50%. Recent plans offer long-term capital gains tax exemption on annual premiums up to ₹2.5 lakh, providing enhanced tax benefits for investors.
For long-term capital gains, ₹1.25 lakh remains tax-free when the fund invests more than 65% in listed equity shares. According to the Income Tax Act, 2025, this tax-free limit applies to money received for insurance policies on or after April 1, 2026. The tax-free threshold is computed with reference to long-term capital gains on shares listed in India, equity-oriented schemes, and ULIP policies where more than 65% is invested in listed equity. Recent developments show that ICICI Pru Smart Goal Assure Plan offers flexible portfolio strategies with four different fund allocation options to suit various risk appetites, providing investors with greater control over their investment approach.
